Generally, Average cost pricing is a method used by the government to regulate monopoly markets. Mostly, in a monopolistic market, the firms tend to produce below the optimal quantity and set high prices. The government uses this tool to set up the average prices which the firms should charge for their products in monopolistic markets. However, there are average costs pricing rule faces some challenges. First, the average cost pricing cannot exist if the average costs are unbounded as the output reduces to zero. Also, in monopolistic markets, the firms are the only one producing the product and upon implementing the rule may refuse to make products or offer the services hence affecting the markets.

Average Cost Pricing:

It is a standardized pricing tool used by regulators to limit the prices of products set by firms. It serves a primary purpose of control the high prices set by the firms, especially in monopolistic markets.