If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to

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Providing a natural monopoly with a fair return requires striking a balance between protecting consumers from price-gouging and maintaining the financial stability of the firm. Setting prices at the minimum average fixed cost would be too low and would not provide enough revenue to allow the firm to make necessary investments in infrastructure, research and development, and other areas. Setting prices at marginal cost would not allow the firm to cover its fixed costs and would result in a loss. Marginal revenue is not relevant for this calculation. Therefore, the most appropriate pricing strategy for a natural monopoly would be to set prices at the level of average total cost. This would allow the firm to make a reasonable profit while also maintaining affordable prices for its customers.

If a Regulatory Commission Wants to Provide a Natural Monopoly