11. One method that is used to regulate prices for natural monopolies is "rate-base pricing." A problem with this method of regulation is that:
- firms still incur losses and so will tend to go out of business.
- it requires that the firm be subsidized by tax payers who don't use the product.
- it encourages over-investment in capital relative to what is efficient.
- it is the same as the profit maximizing price, so the firm is not allocatively efficient.
- it is the same as the two-part tariff, so it is politically unpopular.
Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved