Which of the following best describes average cost regulation of a natural monopoly?
A) It necessitates a subsidy payment to the firm.
B) It imposes a price that is less than marginal cost and less than marginal revenue.
C) It creates incentives that tend to shift average total cost curves in an upward direction.
D) It generates economic losses for the seller.

Question

Quizplus · Accepted Answer

Average cost regulation allows a natural monopoly to cover its costs, including a normal profit, by setting prices equal to average total cost. However, this can reduce the firm's incentive to minimize costs, potentially leading to upward shifts in the average total cost curve.

Which of the Following Best Describes Average Cost Regulation of a Natural