Final answer:
The method of setting charges where providers can set charges to break even or realize a profit is Cost-plus pricing. This method calculates average costs and adds a normal rate of profit to set consumer prices, ensuring sustainable operation without monopolistic overcharging. So, the correct answer is option a.
Step-by-step explanation:
Using the Cost-plus pricing method of setting charges, providers can set charges to break even or realize a profit. This involves regulators allowing a natural monopoly to cover its average costs and earn a normal rate of profit by setting a price where the Average Cost (AC) crosses the demand curve. This pricing strategy ensures that the company can continue to operate without earning abnormally high monopoly profits.
For decades, public utility regulators have used cost-plus regulation by calculating the average cost of production, adding an amount for the normal rate of profit, and setting the price accordingly. This contrasts with price cap regulation, which involves setting a price that may decrease slightly over time and challenges the firm to reduce its costs to remain profitable.
So, the correct answer is option a.