Average cost pricing is one of the ways
the government regulates a
monopoly
A monopoly (from Greek language, Greek and ) is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic Competition (economics), competition to produce ...
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 (AC) 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 is an important factor in determining how businesses will choose to price their pro ...
(ATC) intersects the market
demand curve
A demand curve is a graph depicting the inverse demand function, a 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 us ...
.
The effect on the market would be:
* Increase production and decrease price.
* Increase
social welfare
Welfare spending is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifically to social insurance p ...
(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)