If the government wishes to provide a natural monopolist with a "fair" rate of return, it will force the firm to set

Question

Quizplus · Accepted Answer

Setting price equal to average cost (AC) will ensure that the natural monopolist earns enough revenue to cover its costs, including an appropriate rate of return. Setting price equal to marginal cost (MC) would result in the monopolist earning only enough revenue to cover its variable costs and would not provide a fair rate of return. Setting price equal to marginal revenue (MR) or average variable cost (AVC) would not guarantee that the monopolist earns a fair rate of return.

If the Government Wishes to Provide a Natural Monopolist with a "Fair