What is the meaning of the phrase "dilemma of regulation"?
A) Natural monopolies achieve economies of scale but charge high prices when there is no government regulation; government regulation reduces prices but results in diseconomies of scale.
B) Natural monopolies are profitable, but only if the government permits price discrimination; government regulation to restrict price discrimination reduces monopoly prices, but the regulation also reduces monopoly output.
C) The fair-return price achieves allocative efficiency but may produce economic losses; the socially optimal price yields a normal profit but may not be allocatively efficient.
D) The socially optimal price achieves allocative efficiency but may produce economic losses; the fair-return price yields a normal profit but may not be allocatively efficient.

Question

Quizplus · Accepted Answer

The phrase "dilemma of regulation" refers to the challenge faced by regulators in determining the appropriate price for a natural monopoly. The socially optimal price achieves allocative efficiency, but it may result in economic losses for the firm, while the fair-return price yields a normal profit but may not be allocatively efficient. This dilemma creates a difficult choice for regulators in balancing the needs of consumers and the firm. Option A refers to economies of scale, while Option B discusses price discrimination. Option C also mentions the fair-return price but does not address the issue of regulation.

What Is the Meaning of the Phrase "Dilemma of Regulation