One method of regulating a natural monopoly is known as average-cost pricing.Using this method,the regulator requires that the price be set equal to

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Average-cost pricing requires the price to be set equal to long-run average cost, which ensures that the monopoly is able to earn a reasonable rate of return on its investment while also preventing it from charging excessively high prices. Setting the price equal to internal cost, marginal cost, average variable cost, or average fixed cost would not achieve this balance.

One Method of Regulating a Natural Monopoly Is Known as Average-Cost