One of the arguments frequently raised against a strict marginal-cost approach to pricing is that, under decreasing cost conditions, if the firm equates marginal cost with demand, then it will necessitate the firm's operating at a loss (see Figure 4-2). However, the advocates of a strict marginal-cost approach would still present the argument that individuals are willing to pay the marginal cost of the additional output between Qm and Qr and therefore it should be produced. There is one obvious solution and that is to allow the government to make up the deficit through a subsidy.