If the government regulates a natural monopoly and enforces an average cost pricing, what are the effects on output quantity and price compared to an unregulated natural monopoly?
One is higher and one is lower under average cost pricing.
Average cost pricing is meant to force a natural monopolist to reduce price to where the firm’s average total cost intersects the market demand curve. This results in higher output and a lower price than would prevail for an unregulated natural monopoly.
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