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In view of the problems involved in regulating natural monopolies, compare socially optimal (marginal-cost) pricing and fair-return pricing by referring again to Figure 10

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In view of the problems involved in regulating natural monopolies, compare socially optimal (marginal-cost) pricing and fair-return pricing by referring again to Figure 10.9. Assuming that a government subsidy might be used to cover any loss resulting from marginal-cost pricing, which pricing policy would you favor? Why? What problems might such a subsidy entail?

Fig. 10.9 Regulated monopoly. The socially optimal price Pr, found where D and MC intersect, will result in an efficient allocation of resources but may entail losses to the monopoly. The fairer turn price Pf will allow the monopolist to break even but will not fully correct the underallocation of resources.