Average-Cost Pricing for a Natural Monopoly

Because the imposed regulation encourages aggressive price discrimination tactics that misalign the firm’s cost-structure, resulting in suboptimal pricing and chronic short-run losses.

Because such regulation forces the firm into a mode of overproduction in an attempt to achieve economies of scale that never materialize, thereby saturating the market unexpectedly.

Because regulation typically compels the firm to abandon its efficient production techniques in favor of more capital-intensive methods that are less competitive and more expensive in the short run.

Because the natural monopoly’s high fixed costs mean that even when price covers average total cost, the revenue may not be sufficient to cover variable costs in the short run, leading the firm to incur losses.