Under an average-cost pricing policy

Question

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Under an average-cost pricing policy, a regulatory agency picks a price at which a natural monopoly's demand curve intersects its average cost curve. This price will be equal to the average cost of production, and the firm will earn a normal rate of return (zero economic profit). This policy ensures that the price charged to consumers is reasonable and fair, while also allowing the firm to cover its costs and continue operating in the long run. Picking a price equal to marginal cost or average fixed cost may not be practical or sustainable for the firm. Firms may earn economic profits greater than zero if they are able to operate more efficiently than the average firm, but this would not be a result of the pricing policy itself.

Under an Average-Cost Pricing Policy