Natural Monopoly

Question 1

Natural Monopoly

Answer 1

Natural monopoly is a type of industry where the production of a good can be done more effectively by a single producer than could be accomplished by multiple producers

Question 2

Regulating Natural Monopoly - 2 Strategies

Answer 2

1. Marginal Cost Pricing (P = MC)

2. Average Cost Pricing (P = ATC)

Question 3

Evaluating Marginal Cost Pricing

Answer 3

Advantage: Allocative efficiency is achieved
Disadvantage: Firm forced to produce below ATC (loss making point)

Question 4

Evaluating Average Cost Pricing

Answer 4

Advantage:

1. Firm makes normal profit
2. The price is lower than unregulated market and quantity is higher than unregulated market

Disadvantage:

1. Productive nor allocative efficiency achieved
2. Promotes inefficiency