Average cost pricing is one of the ways government regulate a monopoly market. Monopolists tend to produce less than the optimal quantity pushing the prices up. Government may use average cost pricing as a tool to regulate prices monopolists may charge.
Average cost pricing forces monopolists to reduce price to where the firm's average total cost (ATC) intersects the market demand curve. The effect on the market would be:
- Increase production and decrease price. - Increase social welfare (efficient resource allocation). - Generate a normal profit for monopolist (Price = ATC) *
Famous quotes containing the words average and/or cost:
“All the average human being asks is something he can call a home; a family that is fed and warm; and now and then a little happiness; once in a long while an extravagance.”
—Mother Jones (1830–1930)
“The cost of a thing is the amount of what I will call life which is required to be exchanged for it, immediately or in the long run.”
—Henry David Thoreau (1817–1862)