Average cost regulation of a natural monopoly does not involve:
A) production at a socially inefficient level of output.
B) a tendency for average total cost curves to shift upward over time.
C) a subsidy.
D) production at the output level at which demand intersects the average total cost curve.

Question

Quizplus · Accepted Answer

Average cost regulation aims to prevent natural monopolies from charging excessive prices that would result in monopolistic rents. This is achieved by setting prices at the level equal to average total costs, which includes a normal rate of return. The regulation does not involve a subsidy (choice C) or production at a socially inefficient level of output (choice A), as the goal is to achieve allocative efficiency. While natural monopolies may experience economies of scale, there is no inherent tendency for average total cost curves to shift upward over time (choice B). The optimal output level is where demand intersects the average total cost curve, which is consistent with the goal of average cost regulation.

Average Cost Regulation of a Natural Monopoly Does Not Involve