One justification for government regulation of a monopoly is that the unregulated monopoly

• A. It creates no deadweight loss
• B. It charges a price higher than a competitive market price
• C. It cannot earn profits
• D. It produces at the lowest average cost

Answer: (B)

A monopoly has market power that lets it set prices above what a competitive market would, causing allocative inefficiency. Because price exceeds the marginal cost and the quantity produced is below the social optimum, there is deadweight loss—the value of some mutually beneficial trades is not realized. Government regulation is justified here because it can push price and output closer to competitive levels, reducing that deadweight loss and improving overall welfare. The other statements misstate the situation: an unregulated monopoly does create deadweight loss, monopolies can earn profits, and it does not necessarily produce at the lowest average cost.