Why would it be economically efficient to require a natural monopoly to charge a price equal...

Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead?

Solutions

Expert Solution

When the price is set equal to the marginal cost that is socially efficient because the prices will be low and the quantity produced will be high. But this is not at all good for the firm, if the price is set at the marginal cost the firm would be getting the negative economic profit, and this may lead to shutting down the natural monopoly. This is not good for the society, so the firm would enact the average cost pricing rather than the marginal cost pricing. The natural monopoly has the decreasing average cost so this pricing strategy allows to them obtain little bit of profit.

When the price is set at the marginal cost the firm would incur losses , the average cost of the lies above the price. So the firm would be suffering losses, here the government will give a subsidy to the government other wise the firm will be out of the business.

And if the price is set at the average cost, the firm would be earning the normal profits initially , this pricing allows the firm to survive in the market.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

What is economic efficiency? Why are purely competitive industries economically efficient and monopoly industries are not...

What is economic efficiency? Why are purely competitive industries economically efficient and monopoly industries are not efficient?

Explain why monopoly is considered to be a less economically efficient market form than competition. Show...

Explain why monopoly is considered to be a less economically efficient market form than competition. Show by a diagram the impact on social welfare of the conversion of a competitive market to a monopoly market. Explain how elasticity of demand for a monopolized product is related to the Lerner index of monopoly power.

What is a natural monopoly? Why is government justified in regulating a natural monopoly?

What is natural monopoly? Explain why governments tend to regulate the price charged by natural monopolies?

What is the fair -return price for a regulated natural monopoly and why is this more...

What is the fair -return price for a regulated natural monopoly and why is this more usual that the socially optimal price?

Why must firms try to employ the most economically efficient production techniques?

In a natural monopoly, the government will try to set the price at which the demand...

In a natural monopoly, the government will try to set the price at which the demand curve intersects the monopolist's long-run marginal cost curve. long-run average total cost curve. long-run marginal revenue curve. long-run average fixed cost curve.

Natural monopoly firms are often regulated so that they can only charge prices set by the...

Natural monopoly firms are often regulated so that they can only charge prices set by the authorities. Under one approach, prices are based on the monopolist’s costs so that for any given quantity of sales, the monopolist can only set prices equal to its average costs. 1. Why might regulators believe that forcing the monopoly to charge a price equal to average cost is a good outcome? Does this price regulation maximise social welfare? What problems do you see with...

Explain why reducing pollution levels to zero is unlikely to be economically efficient. Use a graph...

Explain why reducing pollution levels to zero is unlikely to be economically efficient. Use a graph showing a marginal benefit curve and a marginal cost curve to support your explanation. On the graph you must show the shift in curve, equilibrium, and deadweight loss.

13) Economic efficiency requires that a natural monopoly’s price be a. equal to the lowest price...

13) Economic efficiency requires that a natural monopoly’s price be a. equal to the lowest price the firm can charge and still make a normal profit. b. equal to average variable cost (AVC) where the AVC curve intersects the demand curve. c. equal to average total cost (ATC) where the ATC curve intersects the demand curve. d. equal to marginal cost (MC) where the MC curve intersects the demand curve.

Subjects