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:
“That’s one thing I like about Hollywood. The writer is there revealed in his ultimate corruption. He asks no praise, because his praise comes to him in the form of a salary check. In Hollywood the average writer is not young, not honest, not brave, and a bit overdressed. But he is darn good company, which book writers as a rule are not. He is better than what he writes. Most book writers are not as good.”
—Raymond Chandler (1888–1959)
“In the early days of the world, the Almighty said to the first of our race “In the sweat of thy face shalt thou eat bread”; and since then, if we except the light and the air of heaven, no good thing has been, or can be enjoyed by us, without having first cost labour.”
—Abraham Lincoln (1809–1865)