One of the practical difficulties in regulating a natural monopoly using average-cost pricing is:
A)that the average-cost pricing rule leads to losses which must be subsidized.
B)that the price ceiling from average-cost pricing is likely to result in shortages.
C)that the monopoly has no incentive to minimize costs.
D)it will result in a surplus in the market leading to a drastic fall in the price.

Question

Quizplus · Accepted Answer

Average-cost pricing allows the monopoly to cover its costs, but it does not incentivize the monopoly to minimize costs because any cost savings would not increase profits.

One of the Practical Difficulties in Regulating a Natural Monopoly