Question

It is important when regulating a market with a natural monopoly to maintain on going business incentives for the firm involved. A cost-plus approach to regulating a market does not provide this. What would a benefit to not utilizing a cost plus approach to regulation be

Answer 1

The natural monopoly will have incentives for efficiency and innovation

Step-by-step explanation:

Monopoly my be defined as taking or having an excessive control or charge over the trade of a particular commodity or product or the control over the supply of a particular product on the market by one particular group or person.

In the context, the cost-plus approach requires the monopoly in order to change the price which includes normal return to the average cost. So the monopolist does not have any incentive for innovating efficient technology so as to reduce its cost. Thus we can promote innovation and efficiency by not using the cost plus policy.