Question

#19

Simple answer

Assume the government regulates a monopoly by forcing them to lower their prices which results in the monopoly earning a negative economic profit. What social issue will arise if the government offers the monopoly a subsidy to offset the loss?

Answer 1

A monopoly raises price to the point where the negative effect on the quantity sold counterbalances the positive effect of the higher price per unit. Thus a monopoly does not stop raising price until it reaches the point where some or all of the consumers are restricting their consumption due to that price.

What is required for a socially optimal price to happen?

The government must provide the firm a subsidy to offset losses by producing a quantity where price is less than ATC

If the government takes steps to keep price from affecting the purchases of one group of consumers through some subsidization program then the monopoly just moves the price up to the point where some other consumers diminish their consumption of the product due to the higher price.