Question

1. When a natural monopoly is regulated using a marginal cost pricing rule, what can you say about the firm's profit and the market's efficiency?

Answer 1

Sol :

At the point when a natural monopoly is directed using a marginal cost pricing rule, it sets the regulated/controlled price equivalent to the price where the marginal cost curve intersects the demand curve. This price is lower than the monopoly price, and results in a more elevated level of output. The monopoly's economic benefit is wiped out; truth be told, this marginal cost pricing rule outcomes in the firm making economic losses, as marginal cost is less than average total cost for a natural monopoly. Since output increments to the point where marginal cost is equivalent to the price, consumer surplus is augmented/maximized.

The benefit of this strategy of regulation is that it brings about the efficient degree of output and the market is productive/efficient with no deadweight loss.The negative aspect of this regulation is that the firm will suffer an economic loss. Except if subsidized by the government, the firm will in the long run will leave the business, as no firm can work at a loss over the long run.