A single-price natural monopoly that is regulated to set price ...

[D2AR0N]

A single-price natural monopoly that is regulated to set price equal to marginal cost incurs an economic loss. True or false? Explain.
 
  What will be an ideal response?

Question 2

What is a natural monopoly and what problem does natural monopoly pose for regulators?
 
  What will be an ideal response?

[mariahkathleeen]

Answer to Question 1

The statement is true. A natural monopoly's average cost is falling as its output increases. This means that marginal cost is below average cost. Because price equals marginal cost, price is less than average cost so that the firm incurs an economic loss.

Answer to Question 2

A natural monopoly is a firm that can supply the market at lower cost than two or more firms. It can do so because it has declining long-run average total cost over the entire range of market output. Because the LRAC is declining, the marginal cost must be below the LRAC. Therefore, if the regulator forces the firm to price at MC to achieve efficiency (such as is done by a perfectly competitive firm), the natural monopolist will fail to cover its total cost. It incurs an economic loss and requires a government subsidy to survive.

[D2AR0N]

Thank you

[mariahkathleeen]

No problemo