If the government regulates a natural monopoly and sets a "fair return" pricing policy, then the regulated firm will have greater incentive to improve its operating efficiency.

Question

Quizplus · Accepted Answer

A "fair return" pricing policy guarantees the monopoly a normal profit based on its actual costs, which may reduce the firm's incentive to minimize costs or improve efficiency, as any cost savings do not necessarily translate into higher profits for the firm.

If the Government Regulates a Natural Monopoly and Sets a "Fair