If we compare regulating a natural monopoly using a marginal cost pricing rule to using an average cost pricing rule, we see that output is
A) greater with marginal cost pricing, but average cost pricing allows for costs to be covered.
B) the same under both cases, but the profit is greater with average cost pricing.
C) the same but profits are greater with marginal cost pricing.
D) greater with marginal cost pricing, and the firm's profit is larger with marginal cost pricing.
E) greater under average cost pricing, but profits are greater with marginal cost pricing.

Question

Quizplus · Accepted Answer

Using marginal cost pricing will result in the natural monopoly producing a greater output, leading to greater social welfare. However, this may not be enough to cover all of the firm's costs. Using average cost pricing will ensure that the firm's costs are covered, but it may lead to a lower output level and potentially lower social welfare. Therefore, using a combination of both pricing rules may be the most effective way to regulate a natural monopoly.

If We Compare Regulating a Natural Monopoly Using a Marginal