If a natural monopoly does NOT inflate its costs, the output it produces is the smallest when the monopoly is
A) left unregulated.
B) regulated according to an average cost pricing rule.
C) regulated according to a marginal cost pricing rule.
D) regulated to maximize total surplus.

Question

Quizplus · Accepted Answer

When a natural monopoly is left unregulated, it will produce the smallest output because it will set its output where marginal cost equals marginal revenue to maximize its own profit, which results in a lower output compared to when it is regulated.

If a Natural Monopoly Does NOT Inflate Its Costs, the Output