Economic efficiency requires that a natural monopoly's price be
A)equal to average total cost where it intersects the demand curve.
B)equal to marginal cost where it intersects the demand curve.
C)equal to average variable cost where it intersects the demand curve.
D)equal to the lowest price the firm can charge and still make a normal profit.

Question

Quizplus · Accepted Answer

Economic efficiency requires that the price of a natural monopoly is set at the point where the marginal cost curve intersects the demand curve. This is because at this point, the firm is producing the quantity where the last unit produced adds as much value to society as it costs to produce. If the price is set higher than this point, there will be deadweight loss and inefficiency in the market. If the price is set lower than this point, the firm will not be able to cover its costs and stay in business. Therefore, option (B) is the correct choice.

Economic Efficiency Requires That a Natural Monopoly's Price Be