It is unrealistic to regulate a natural monopoly at marginal cost pricing because _____

Marketing Dec 29, 2020

It is unrealistic to regulate a natural monopoly at marginal cost pricing because _____.

Expert Solution

It is unrealistic to regulate a natural monopoly at marginal cost pricing because it leads to losses.

Setting the price equivalent to the marginal cost is not a correct idea for a monopoly. The reason is that in such markets, the ATC declines as the quantum of output is raised. So, if P is set as being equivalent to MC, P will be less than ATC and that would lead to incurring of losses.

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