Question

One of the common policy instruments for natural monopoly is a price regulation. Moreover, the best price regulation for the policy maker is to set the price at the marginal cost.

True or False

Answer 1

Answer:

TRUE

Reason: By regulating price in such a way that it is set at the marginal cost is always a choice of regulators because this price which is set at MC, has the following advantages:

• Efficient allocation of resources
• Assures consumers a higher quantity and lower price than in case of monopoly

This is because value to the consumers of the last unit bought and sold in this market will be equal to the marginal cost of producing it.

(the quantity produced will be at a point where MC crosses demand curve)