A natural monopoly under rate of return regulation has an incentive to
A) pad its costs.
B) produce more than the efficient quantity of output.
C) charge a price equal to marginal cost.
D) maximize consumer surplus.

Question

Quizplus · Accepted Answer

A natural monopoly under rate of return regulation has an incentive to pad its costs as higher costs would increase the rate of return allowed by the regulator. This means that the monopoly would try to increase costs to get a higher allowed rate of return, resulting in higher prices for consumers.

A Natural Monopoly Under Rate of Return Regulation Has an Incentive