One problem with government operation of monopolies is that:

• A. Prices are always set below the marginal cost of production.
• B. It guarantees perfect competition in the market.
• C. There may be little incentive for efficiency or cost reduction.
• D. Consumers always receive higher quality products.

Answer: (C)

Verified step by step guidance

1. Understand the nature of government-operated monopolies: Unlike private monopolies, government monopolies may not face the same profit-maximizing incentives.
2. Recall that in a typical private monopoly, the firm sets prices above marginal cost to maximize profits, but government monopolies might prioritize other objectives such as service provision or employment.
3. Recognize that because government monopolies do not operate under competitive pressure, they may lack strong incentives to minimize costs or improve efficiency.
4. Analyze why prices being set below marginal cost or guaranteeing perfect competition are generally not characteristics of government monopolies; these options are incorrect.
5. Conclude that the key issue with government monopolies is the potential lack of incentive for efficiency or cost reduction, which can lead to higher costs and less innovation.