In order to ensure allocative efficiency on the part of a natural monopoly, regulators would set price equal to marginal cost.

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Allocative efficiency occurs when the price charged by a firm is equal to its marginal cost, as this results in the most socially efficient level of output. This is particularly important for natural monopolies, where there is only one firm supplying the market, as they have the potential to charge higher prices and restrict output without competition. Regulators may therefore set price equal to marginal cost in order to prevent monopolistic pricing and ensure allocative efficiency.

In Order to Ensure Allocative Efficiency on the Part of a Natural