A natural monopoly has an incentive to pad its cost of production under which type of regulation?

Question

Quizplus · Accepted Answer

Profit regulation incentivizes a natural monopoly to inflate its production costs because the regulatory body sets allowable prices based on the firm's costs plus a standard profit. If the firm reports higher costs, it can charge higher prices while maintaining its profit margin, thus benefiting from inflated cost reports.

A Natural Monopoly Has an Incentive to Pad Its Cost