How should a natural monopoly be regulated under the social interest theory of regulation?
A) by setting price equal to the average cost of production
B) by allowing a price that maximizes the profit of the natural monopoly
C) by using a marginal cost pricing rule
D) by subsidizing other producers to compete with the monopoly
E) by using rate of return regulation

Question

Quizplus · Accepted Answer

The social interest theory of regulation aims to achieve economic efficiency and allocative efficiency in a natural monopoly market. Allocative efficiency is achieved when the price charged by the natural monopoly reflects the marginal cost of production. Therefore, using a marginal cost pricing rule ensures that the price charged by the natural monopoly is not too high, which promotes economic efficiency by ensuring that resources are allocated efficiently. Moreover, this will provide fair market competition, which is essential in retaining customer trust in the market.

How Should a Natural Monopoly Be Regulated Under the Social