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

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

Accepted Answer

∻Solution∻ ‖ a ⋮ Definition of Deadweight Loss: Deadweight loss occurs when the market is not in equilibrium, leading to a loss of economic efficiency. In the context of a natural monopoly, this typically happens when the price is set above the marginal cost (MC), resulting in a lower quantity produced and consumed than the socially optimal level. ‖ ‖ b ⋮ Identifying the Socially Optimal Price: The socially optimal price is where the demand curve (D) intersects the marginal cost curve (MC). This is because, at this point, the price consumers are willing to pay equals the cost of producing an additional unit, eliminating deadweight loss. ‖ ‖ c ⋮ Analyzing the Graph: From the graph, the intersection of the demand curve (D) and the marginal cost curve (MC) occurs at the price level $P_{3}$. This is the price where the quantity produced and consumed is socially optimal, eliminating deadweight loss. ‖ ‖ d ⋮ Conclusion: Therefore, the government should set the price at $P_{3}$ to eliminate deadweight loss. ‖ ∻Answer∻ ⚹ (C) $P_{3}$ ⚹ ∻Key Concept∻ ⚹ Socially Optimal Price ⚹ ∻Explanation∻ ⚹ The socially optimal price is where the demand curve intersects the marginal cost curve, ensuring that the price consumers are willing to pay equals the cost of producing an additional unit, thus eliminating deadweight loss. In this case, it is $P_{3}$. ⚹◊What is the relationship between deadweight loss and the price set by the government in a natural monopoly market⍭ Generate me a similar question◊

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