Policymakers are discussing various proposals regarding how to deal with natural monopolies.Transportation Minister Gaston wants to regulate natural monopolies by equating price with average total cost.Gaston contends that such a policy will ensure that monopolies make every effort to reduce costs.Finance Minister Chen wants the government to own natural monopolies.Chen argues that government-owned monopolies usually do a better job of holding down costs than privately owned monopolies.Which Minister's argument is correct
A)Transportation Minister Gaston's argument
B)Finance Minister Chen's argument
C)both ministers' arguments
D)neither minister's argument

Question

Quizplus · Accepted Answer

Both ministers' arguments have flaws. Equating price with average total cost may not necessarily lead to cost reduction for natural monopolies, as they do not face competition and may not have the incentive to lower costs. On the other hand, government-owned monopolies may not necessarily do a better job of holding down costs, as they may lack the profit motive and face political pressure which may lead to inefficiencies. A better solution may require a case-by-case analysis and a combination of different approaches such as regulation, competition, and public-private partnerships.

Policymakers Are Discussing Various Proposals Regarding How to Deal with Natural