When regulators use a marginal cost pricing strategy to regulate a natural monopoly, the regulated monopoly:

a. Will experience a loss,

b. Will experience a price below average total cost,

c. May rely on a government subsidy to remain in business,

d. All of the above are correct.

• The correct answer is d. All of the above are correct.

One of the ways a government regulates a natural monopoly is by implementing the marginal cost pricing strategy. This strategy implies that the natural monopolist sets the price equal to its marginal cost; however, the problem of this strategy is that the natural monopolies have a declining average total cost curve. As a consequence, the marginal cost curve and price are going to be below the average total cost. This implies that the natural monopolist will obtain economic losses that can make the monopolist exit the market. Nevertheless, the government might subsidize the natural monopolist to offset these economic losses and promote the continuation of operations. Therefore, the correct answer is d.