What problem is caused by subsidizing a natural monopoly regulated using a marginal cost pricing rule?
A) The regulated firm ends up earning an economic profit.
B) Consumers pay too much for the product of the monopoly.
C) This policy is a two-part tariff, which creates inefficiency.
D) The taxes required to gain the revenue used as the subsidy result in a deadweight loss that subtracts from gains in efficiency which result from use of the marginal cost pricing rule.
E) The regulated firm goes out of business if it is subsidized.

Question

Quizplus · Accepted Answer

Subsidizing a natural monopoly regulated using a marginal cost pricing rule leads to taxation which results in a deadweight loss. This deadweight loss counteracts the gains in efficiency from using the marginal cost pricing rule, leading to an overall reduction in social welfare. Therefore, choice D is the correct answer.

What Problem Is Caused by Subsidizing a Natural Monopoly Regulated