Asked by Bruce Eugine on Jul 15, 2024
Verified
With a natural monopoly, the fair-return price
A) is allocatively efficient; the socially optimal price is allocatively inefficient.
B) is allocatively inefficient; the socially optimal price is allocatively efficient.
C) and the socially optimal price are both allocatively inefficient.
D) and the socially optimal price are both allocatively efficient.
Natural Monopoly
A market condition where due to high fixed or start-up costs, efficient service is provided by a single firm instead of multiple competing firms, often seen in utilities sectors.
Fair-Return Price
For natural monopolies subject to rate (price) regulation, the price that would allow the regulated monopoly to earn a normal profit; a price equal to average total cost.
Allocatively Efficient
A state of resource allocation in which it is impossible to make any one individual better off without making someone else worse off.
- Understand the implications of natural monopoly and the concept of fair-return and socially optimal prices.
Verified Answer
CC
Cathalina CorderoJul 15, 2024
Final Answer :
B
Explanation :
In a natural monopoly, the fair-return price (where price equals average total cost) is allocatively inefficient because it does not equate marginal cost and price, leading to underproduction. The socially optimal price (where price equals marginal cost) is allocatively efficient because it ensures that the price reflects the true cost of producing one more unit, leading to an optimal allocation of resources.
Learning Objectives
- Understand the implications of natural monopoly and the concept of fair-return and socially optimal prices.