To allow a public utility (which is a natural monopoly)to earn only a normal profit, the government should
A)do all of the following
B)set price equal to average cost
C)equate marginal cost and average cost
D)set marginal cost equal to marginal revenue
E)set price equal to marginal cost

Question

Quizplus · Accepted Answer

Setting the price equal to average cost would allow the public utility to earn only a normal profit because it would cover all of the costs incurred by the utility in producing and distributing the product/service. This would ensure that the public utility is not earning excessive profits at the expense of consumers, but is also able to operate and maintain its infrastructure. Equating marginal cost and average cost would result in a situation where the public utility is producing at the lowest possible cost, which would maximize efficiency and minimize waste. However, setting marginal cost equal to marginal revenue or price equal to marginal cost may result in the public utility earning more than a normal profit, and doing all of the above may not be necessary or feasible.

To Allow a Public Utility (Which Is a Natural Monopoly)to