Question

If the government regulates a natural monopolist to produce the allocatively efficient level of output, it will require the monopolist to set a price that is:

a. equal to its marginal cost and grant a subsidy to cover the loss

b. equal to its average total cost and levy a tax on the excess profit

c. greater than its marginal cost and levy a tax on the excess profit

d. greater than its marginal cost but that minimizes the deadweight loss

e. greater than its average total cost but that minimizes the deadweight loss

Answer 1

Answer:

a. equal to its marginal cost and grant a subsidy to cover the loss

Explanation:

In a competitive market there is allocative efficiency non fixing of prices.

The price of commodity is equal to it's marginal cost.

A socially optimal level of output is produced thereby demand will equal marginal cost.

A monopolist however will not set price that is equal to marginal cost normally. Instead they will less goods at a higher cost and charge higher price on it.

If a government wants to regulate a monopoly the best option will be for the monopolist to set a price equal to its marginal cost and government grant a subsidy to cover the loss