AP MicroeconomicsMarket Failure & Government
Fair-Return Price (Average-Cost Pricing)
A fair-return price regulates a natural monopoly at the point where price equals average total cost (P = ATC), so the firm earns zero economic (normal) profit.
Because marginal-cost pricing forces a loss-making price on a natural monopoly, regulators commonly set price where the demand curve crosses the ATC curve. At this fair-return (average-cost) price the firm covers all costs including a normal profit, needing no subsidy, while producing more and charging less than an unregulated monopoly would. The catch is that it is not fully efficient: price still exceeds marginal cost (P > MC), so some deadweight loss remains. It is the standard real-world regulatory compromise.
Formula / Example
Set P = ATC ⇒ zero economic profit; still P > MC, so some deadweight loss remains.