Question

question
when the government attempts to set the price at marginal cost through the force of regulation, a natural monopoly firm will likely lose money and go out of business unless ____________.
select the correct answer below:
the government convinces them to merge with more successful firms
the government allows them to be aquired by more successful firms
the government cuts prices further
the government offers the firm an ongoing public subsidy
content attribution

Explanation:

A natural monopoly has high fixed costs. When price is set at marginal cost (which is low as fixed costs are spread over output), revenue may not cover total costs (fixed + marginal). A subsidy can cover the short - fall (total cost - total revenue when price = marginal cost). Merging (options 1 and 2) doesn't directly address the cost - revenue gap from price - setting. Cutting prices further (option 3) would worsen the loss.

Answer:

the government offers the firm an ongoing public subsidy