When government regulations force a natural monopoly to produce where price equals average total cost, social welfare is:

Question

When government regulations force a natural monopoly to produce where price equals average total cost, social welfare is:​

Quizplus · Accepted Answer

When a natural monopoly is forced to produce at the point where price equals average total cost, it results in a situation known as "productive efficiency." While this does increase social welfare compared to a situation where the monopoly is able to charge higher prices and earn greater profits, it is not the most efficient outcome possible. With the right regulatory policies, it is possible to achieve both productive efficiency and allocative efficiency (where price equals marginal cost), which would result in even greater social welfare. Therefore, choice C is correct, as social welfare is greater than it would be without regulation, but it is not maximized.

When Government Regulations Force a Natural Monopoly to Produce Where