Figure 12-8 Pricing Policies for Natural Monopolies
Figure 12-8 illustrates a natural monopoly and shows that the firm’s
LRAC curve is declining over the entire range of the market demand
curve. Since LRAC is declining, MC is less than long-run average cost. It
follows that when price is set equal to marginal cost, price will be less
than average cost, and marginal-cost pricing will lead to losses.