Autility for water is a natural monopoly in the local market. what is the optimal action to take when looking at keeping a competition policy for a the water utility? (a) set the price where ac crosses the demand curve.(b) set the price at the breakeven point.(c) set the price below the average cost of production.

A

Explanation:

Without market intervention, monopolies produce at a quantity in which price is greater than the marginal cost, therefore they obtain positive benefits. To keep a competition policy, the interventionist should set the price where the average total cost (ATC) crosses the demand curve (also the average total revenue). In this case, the intercept represents the point where the total cost is equal to the total revenue (TC=TR), there are no positive benefits as competitive markets.  

It could also be option B, because the term "break-even" means no profits and no losses. But in monopolies, this point is where the ATC equals the ATR or demand (it is not the point Marginal Cost=Marginal Revenue because in most cases the ATC curve is above this point, so it would be better to shut down the firm), that is why I chose option A.

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