Regulators employ average cost pricing instead of marginal cost pricing because

Question

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Regulators employ average cost pricing instead of marginal cost pricing because price must be high enough to cover all opportunity costs if the firm is to stay in business. Marginal cost pricing only covers the direct cost of producing one more unit, but it does not cover fixed costs, which would result in a loss for the firm if the price was set too low. On the other hand, average cost pricing covers both the direct and fixed costs, ensuring that the firm is able to stay in business and provide service to consumers.

Regulators Employ Average Cost Pricing Instead of Marginal Cost Pricing