If a natural monopoly has an average cost pricing rule imposed, the rule will
A) maximise total surplus in the regulated industry.
B) reduce the consumer surplus and generate a deadweight loss when compared to a marginal cost pricing rule.
C) generate an economic loss for the regulated firm.
D) set price below marginal cost.

Question

Quizplus · Accepted Answer

An average cost pricing rule, while allowing the monopoly to cover its costs, does not ensure efficiency or maximization of total surplus. It typically results in a price higher than the marginal cost, leading to reduced consumer surplus and a deadweight loss compared to a scenario where price equals marginal cost (marginal cost pricing rule).

If a Natural Monopoly Has an Average Cost Pricing Rule