One problem with regulating a monopolist on the basis of cost is that
A)by focusing on costs, the regulators ignore profits.
B)it does not provide an incentive for the monopolist to reduce its cost.
C)a monopolist's costs, by definition, are higher than costs of perfectly competitive firms.
D)a monopolist is still able to generate excessive economic profits.

Question

Quizplus · Accepted Answer

Regulating a monopolist solely based on cost does not provide any incentive for the monopolist to innovate or improve efficiency. Therefore, the monopolist may not reduce costs even if it is possible. Additionally, regulating on cost does not guarantee that consumers will benefit from lower prices since the monopolist may still generate excessive economic profits due to its market power.

One Problem with Regulating a Monopolist on the Basis of Cost