With a natural monopoly,
A) regulation can take the form of average cost pricing to allow coverage of costs.
B) regulation takes the form of breaking the company into several competing firms.
C) regulation takes the form of forcing the company out of business.
D) regulation takes the form of forcing competition from new firms.
E) no regulation is necessary because it is a natural monopoly.

Question

Quizplus · Accepted Answer

With a natural monopoly, regulation can take the form of average cost pricing to allow coverage of costs, as the high fixed costs associated with a natural monopoly may make it difficult to cover costs through marginal cost pricing. This can ensure that the monopoly is not charging excessively high prices, while still allowing them to earn a reasonable rate of return. Breaking the company into several competing firms may not be feasible due to the high fixed costs, while forcing the company out of business or forcing competition from new firms may not be desirable if the natural monopoly is providing a valuable service to consumers.

With a Natural Monopoly