Under incentive regulation, if a regulated natural monopoly achieves average total cost lower than the regulated price, it can
A)trade the extra profits for other regulatory leniencies.
B)be exposed to a higher tax.
C)decrease its output.
D)keep the extra profits.
E)increase its output.

Question

Quizplus · Accepted Answer

If a regulated natural monopoly achieves average total cost lower than the regulated price, it can keep the extra profits. This is called "earnings sharing" or "profit sharing" and is a common feature in incentive regulation, which aims to encourage efficiency by rewarding firms that can produce at lower costs. However, if the regulated monopoly consistently earns above-normal profits over a longer period of time, the regulator may adjust the price cap or demand that the firm shares some of the gains with consumers through lower prices or refunds.

Under Incentive Regulation, If a Regulated Natural Monopoly Achieves Average