question archive When regulating a natural monopoly, one of the problems with setting price equal to average cost is that: a
When regulating a natural monopoly, one of the problems with setting price equal to average cost is that: a
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When regulating a natural monopoly, one of the problems with setting price equal to average cost is that:
a. There is no incentive for the monopolist to lower its costs,
b. Consumer surplus is not maximized,
c. Total surplus is not optimized,
d. All of the above are correct.
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- The correct option is (d). All the above are correct.
In the case of the natural monopoly, there is a single seller in the market; therefore, the monopolist will set the price higher than the average cost so that he can easily maximize he can maximize its consumer surplus along with the total surplus so that he has an incentive to lower the cost to acquire a larger share in the market. But, if the price charged by a natural monopolist becomes the same as the average cost then it does not maximizes the consumer surplus along with the total surplus and he also does not have an incentive to lower the cost to sell additional units in the market.
