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Economic Definition of average-cost pricing. Defined.

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Term average-cost pricing Definition: A regulatory policy used for public utilities (especially those that are natural monopolies) in which the price received by a firm is set equal to the average total cost of production. The great thing about average-cost pricing is that a regulated public utility is guaranteed a normal profit, usually termed a fair rate of return. One bad thing about average-cost pricing is that marginal cost is less than average total cost meaning that price is greater than marginal cost. As such, the public utility is NOT operating according to the price equals marginal cost (P = MC) rule of efficiency.


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