How does the government determine the quota amount that will ...

[notis]

How does the government determine the quota amount that will produce an efficient use of a common resource?
 
  What will be an ideal response?

Question 2

Which of the following types of economic regulation is most likely to encourage a natural monopoly to NOT inflate its costs?
 
  A) average cost pricing rule
  B) rate of return regulation
  C) price cap regulation
  D) None of the above encourages cost cutting.

[kescobar@64]

Answer to Question 1

The government must determine the marginal social benefit and the marginal social cost of the common resource. By equating marginal social benefit to marginal social cost, the efficient use of a common resource is determined. A quota is set to this level of production. Producers are assigned a portion of this quota. As long as no one cheats on his or her quota, the efficient outcome occurs.

Answer to Question 2

C