Average cost pricing is one of the ways
the government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
regulates a
monopoly
A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...
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 In economics, average cost or unit cost is equal to total cost (TC) divided by the number of units of a good produced (the output Q):
AC=\frac.
Average cost has strong implication to how firms will choose to price their commodities. Firms’ sale ...
(ATC) intersects the market
demand curve
In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...
.
The effect on the market would be:
* Increase production and decrease price.
* Increase
social welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet Basic needs, basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refe ...
(efficient resource allocation).
* Generate a normal profit for monopolist (Price = ATC) *
RePEc
"Marginal vs. Average Cost Pricing in the Presence of a Public Monopoly", ''American Economic Review'' v.73:189-93 (1983).
References
{{reflist
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
Monopoly (economics)