Rate of return regulation is designed to allow a natural monopoly to
A) make zero economic profit.
B) underestimate its average cost.
C) make zero normal profit.
D) make an economic profit.
E) compete with any firm entering the market.

Question

Quizplus · Accepted Answer

Rate of return regulation sets a limit on the amount of profit a natural monopoly can earn, typically based on the cost of providing the service. This prevents the monopoly from charging excessively high prices that would harm consumers. By setting the limit at the cost of providing the service, the monopoly can still earn a reasonable rate of return on its investment, but will not be allowed to earn economic profits. Therefore, the goal is for the natural monopoly to make zero economic profit.

Rate of Return Regulation Is Designed to Allow a Natural