In practice, regulatory boards try to set the price of a natural monopoly so that price covers a normal return on capital investment. As a result:
A) there is an incentive to use less equipment.
B) there is an incentive to use more equipment.
C) the incentive to use equipment stays the same.
D) the price of equipment should decrease.

Question

Quizplus · Accepted Answer

When regulatory boards set prices to cover a normal return on capital investment, natural monopolies have an incentive to use more equipment because their returns are based on the capital invested. This can lead to over-investment in capital to increase the allowed return.

In Practice, Regulatory Boards Try to Set the Price of a Natural