If a public utility is subject to average-cost pricing regulation, what can we conclude?
A) It will produce the socially efficient level of output.
B) It will earn an above-normal rate of return.
C) It will suffer economic losses without a subsidy.
D) It will earn a normal rate of return.

Question

Quizplus · Accepted Answer

Average-cost pricing regulation is designed to allow a public utility to earn a normal rate of return. This means that the utility is required to set prices that cover its average total cost, including a normal profit margin. As a result, the utility is not likely to earn above-normal returns, but it may also not produce the socially efficient level of output, which occurs where marginal cost equals marginal benefit.

If a Public Utility Is Subject to Average-Cost Pricing Regulation