consumers a higher quantity and lower price than at the monopoly choice A. In fact, efficient allocation of

resources would occur at point C, since the value to the consumers of the last unit bought and sold in this

market is equal to the marginal cost of producing it.

Attempting to bring about point C through force of regulation, however, runs into a severe difficulty. At point C,

with an output of 8, a price of 3.5 is below the average cost of production, which is 5.7, so if the firm charges a

price of 3.5, it will be suffering losses. Unless the regulators or the government offer the firm an ongoing public

subsidy (and there are numerous political problems with that option), the firm will lose money and go out of

business.

Perhaps the most plausible option for the regulator is point F; that is, to set the price where AC crosses the

demand curve at an output of 6 and a price of 6.5. This plan makes some sense at an intuitive level: let the
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