Consider a government-owned natural monopolist with a constant marginal cost (a horizontal marginal cost curve). This monopolist is instructed by the Government to set price equal to marginal cost. Construct a well-labeled diagram which shows that this monopolist will make an economic loss. Shade-in the area which represents the economic loss (please do not shade any other areas in). Please discuss the benefit and cost to society of the Government’s marginal cost pricing policy.

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