When a regulator allows a monopolist to set its price equal to long-run average cost, the regulator is practicing

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When a regulator allows a monopolist to set its price equal to long-run average cost, it is practicing average cost pricing. This approach sets the price equal to the average cost of production over the long run, including both fixed and variable costs. Marginal cost pricing would set the price equal to the incremental cost of producing one more unit, while operating cost pricing would only consider the variable costs of production. Optimal cost pricing is not a commonly used term in economics.

When a Regulator Allows a Monopolist to Set Its Price