As noted in the chapter, separating the production of electricity from its delivery has led to considerable deregulation of producers.
a. Briefly explain which of these two aspects of the sale of electricity remains susceptible to natural monopoly problems.
b. Suppose that the potential natural monopoly problem you identified in part (a) actually arises. Why is marginal cost pricing not a feasible solution? What makes average cost pricing a feasible solution?
c. Discuss two approaches that a regulator could use to try to implement an average-cost-pricing solution to the problem identified in part (a).