A local utility company is the only provider of water in a small town. To keep its prices low and attract more customers, the company sets its prices below average total costs. How does this pricing strategy affect resource allocation in the town?

When a local utility company sets its prices below average total costs, it is using a strategy that can lead to lower prices for consumers. This means residents in the town pay less for water, which can make it more affordable for everyone. However, since the company is not covering its costs, it may struggle to maintain its services or invest in improvements, which could lead to problems in the long run. For example, if the company cannot afford to repair old pipes, residents might face water quality issues. Overall, while lower prices benefit consumers now, it can hurt the company's ability to provide reliable service in the future, affecting resource allocation in the town.