The market for electricity in Frankland is a natural monopoly. The government of Frankland wants to regulate Gator Lighting and Power, the sole producer of electricity in Frankland. The government wants to set a price that eliminates deadweight loss and will provide the firm with a subsidy if necessary. The firm's cost curves and demand are shown here.

What price should the government set to eliminate deadweight loss?

Choose 1 answer:
(A) $P_{3}$
(B) $P_{1}$
(C) $P_{2}$
(D) There is no price that eliminates deadweight loss.
() $P_{4}$

Question

The market for electricity in Frankland is a natural monopoly. The government of Frankland wants to regulate Gator Lighting and Power, the sole producer of electricity in Frankland. The government wants to set a price that eliminates deadweight loss and will provide the firm with a subsidy if necessary. The firm's cost curves and demand are shown here.

What price should the government set to eliminate deadweight loss?

Choose 1 answer:
(A) $P_{3}$
(B) $P_{1}$
(C) $P_{2}$
(D) There is no price that eliminates deadweight loss.
() $P_{4}$

Accepted Answer

∻Solution∻ ‖ a ⋮ Identifying the Efficient Scale of Production: The efficient scale of production is where the Marginal Cost (MC) curve intersects the Average Total Cost (ATC) curve. This point minimizes the average cost per unit of output. ‖ ‖ b ⋮ Determining the Socially Optimal Price: To eliminate deadweight loss in a natural monopoly, the government should set the price equal to the Marginal Cost (MC) at the quantity where the Demand curve (D) intersects the MC curve. This is the socially optimal price and quantity, where $P = MC$ and consumer surplus is maximized. ‖ ‖ c ⋮ Analyzing the Graph: The graph shows that the socially optimal quantity is at $Q2$, where the MC curve intersects the Demand curve (D). The corresponding price level on the vertical axis is $P2$. ‖ ∻Answer∻ ⚹ (C) $P_{2}$ ⚹ ∻Key Concept∻ ⚹ Socially Optimal Pricing in Natural Monopolies ⚹ ∻Explanation∻ ⚹ To eliminate deadweight loss in a natural monopoly, the government should set the price where the demand curve intersects the marginal cost curve, ensuring that price equals marginal cost. ⚹◊What is the formula for deadweight loss in a natural monopoly market?⍭ Generate me a similar question◊

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