The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially
The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price: LO12.7 a. may be so low that the regulated monopoly can’t break even. b. may cause the regulated monopoly to engage in price discrimination. c. may be higher than the monopoly price.
Here is the full solution including the answer and explanation.
a is correct
A monopolist always charges a price greater than its marginal cost with a motive of profit maximization. Consequently, for a monopolist to keep its price at a socially optimum level ( P = MC) would be difficult. As at this level, the monopolist would not be able to cover its fixed cost, the monopolist would be below its break-even point level and might end up shutting down. There are alternatives to prevent the monopolist from going bankrupt either through fair return pricing or giving public subsidy to the monopolist in order to make up for its losses.
b is incorrect
A monopolist practices price discrimination and charges different prices for the same commodity or service from different consumers. A regulated monopoly cannot engage in price discrimination.
c is incorrect
The socially optimal price is when the price is equal to the marginal cost, and it is always below the monopoly price. The monopolist always charges a price higher than the marginal cost and does not attain social optimality. A lot of resources remain unallocated because the monopolist produces at a level of quantity below the socially optimal level of output.
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