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Natural Monopoly


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Average-Cost Pricing
One option is for regulators to force a natural monopoly to charge a price no higher than the average cost of production. This rule would force the natural monopoly to lower its price and would also give the monopoly an incentive to increase output.

While this rule would get the market closer to the socially optimal outcome (where the socially optimal outcome is to charge a price equal to marginal cost), it still has some deadweight loss since the price charged still exceeds marginal cost. Under this rule, however, the monopolist is making an economic profit of zero since price is equal to average cost.

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