A natural monopoly is considering pricing strategies to maintain market share. Which pricing approach would most likely lead to allocative efficiency while ensuring the firm does not incur losses?

A natural monopoly occurs when a single firm can supply a good or service to an entire market at a lower cost than multiple firms could. To achieve allocative efficiency, which means resources are distributed in a way that maximizes overall satisfaction, the monopoly could use a pricing strategy called marginal cost pricing. This approach sets the price equal to the cost of producing one more unit of the good. For example, if the cost to produce one additional unit is $5, the firm would charge $5 for that unit. However, to avoid losses, the monopoly may also need to receive a subsidy or adjust its pricing in other areas to ensure that total revenue covers its total costs.