Question

What is the price and quantity for this natural monopolist under fair return pricing?

Answer 1

The fixed capital costs are small relative to total costs is the  price and quantity for this natural monopolist.

The allocatively efficient amount of production, or socially optimal amount, is where demand equals the marginal cost, but the monopoly does not produce at that point. Instead, monopolies lead to dead weight due to high costs and too little production.

If a monopoly increases sales volume, all other things being equal, total sales increase. This is called the production effect. A monopolist's profit is equal to (price - marginal cost) times quantity. Monopoly average revenue is total revenue divided by production volume.

If the market does not produce at an efficient time, the welfare of society will be lost. The yellow triangle represents lost consumer surplus, and the red triangle represents lost producer surplus if the market were operating with monopolistic rather than competitive production.

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