Average cost pricing
Average cost pricing is one of the ways
the government regulates a monopoly market. Monopolists tend to produce less than the optimal quantity pushing the prices up. The 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) *[1]
References
External links
- Average Cost Pricing Rule on Investopedia
- Chen, Yan. "An Experimental Study of the Serial and Average Cost Pricing Mechanisms," Journal of Public Economics (2003).
- "Marginal Cost versus Average Cost Pricing with Climatic Shocks in Senegal: A Dynamic Computable General Equilibrium Model Applied to Water" by ANNE BRIAND, University of Rouen, November 2006
- Average cost pricing at Statistics Canada