1.2 What is the average cost pricing rule? Why is it not an efficient way of regulating a natural monopoly? A natural monopoly cannot always be regulated to achieve an efficient outcome. Two possible ways of enabling a regulated monopoly to avoid an economic loss are:

◆ Average cost pricing

◆ Government subsidy Average Cost Pricing An average cost pricing rule sets the price equal to average total cost. With this rule the firm produces the quantity at which the long-run average cost curve cuts the demand curve.