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:
“Always remember that a child doesn’t have to be average to be normal. Children with very different temperaments can be equally successful.”
—Lawrence Kutner (20th century)
“How much would it cost you to stand at the wrong end of a shooting gallery?”
—S.J. Perelman, U.S. screenwriter, Bert Kalmar, Harry Ruby, and Norman Z. McLeod. Groucho Marx, Horsefeathers, Huxley College president to con artist Baravelli (Chico Marx)