Why does the government usually regulate natural monopolies?

• A. To eliminate all forms of competition in the market.
• B. To prevent the monopolist from charging excessively high prices and to ensure efficient allocation of resources.
• C. To allow the monopolist to maximize profits without any restrictions.
• D. To encourage the monopolist to increase production beyond the socially optimal level.

Answer: (B)

Verified step by step guidance

1. Understand what a natural monopoly is: it occurs when a single firm can supply the entire market at a lower cost than multiple competing firms due to economies of scale.
2. Recognize that without regulation, a natural monopolist can set prices higher than the competitive level, leading to allocative inefficiency and potential consumer harm.
3. Identify the government's role in regulating natural monopolies to prevent the monopolist from charging excessively high prices, which protects consumers.
4. Note that regulation aims to ensure resources are allocated efficiently, often by setting price caps or controlling output to mimic competitive market outcomes.
5. Understand that the goal is not to eliminate competition entirely or to allow unrestricted profit maximization, but to balance fair pricing with sustainable production.