Question

The purpose of government regulation of natural monopolies is to do which of the following?

A

To allow monopolies to exist

B

To allow monopolies to exist when they can produce at higher costs

C

To allow monopolies to exist when they can produce at lower costs

D

To not allow monopolies to exist because they always fail

Answer 1

Answer

Option C

To allow monopolies to exist when they can produce at lower costs

A natural monopoly exists if the firm has economics of scale means the average total cost of one firm is lower than the average total cost of two firms producing same quantity means government needs to keep natural monopolies because it can produce at lower quantity and regulating it means keeping a rule for pricing on the basis of the efficient level of output which increases social welfare.