When government owns a natural monopoly and avoids subsidies,it:
A) still creates deadweight loss.
B) sets price above marginal cost.
C) recognizes setting price equal to marginal cost would cause the enterprise to incur losses.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

When a government owns a natural monopoly and avoids subsidies, it still creates deadweight loss and sets price above marginal cost. This is because natural monopolies typically have high fixed costs, making it prohibitive for new firms to enter the market and compete. Therefore, the government may choose to set prices above the marginal cost to ensure the enterprise can cover its fixed costs and remain financially sustainable.

When Government Owns a Natural Monopoly and Avoids Subsidies,it