Solution of Utility Pricing Rules:

a) Taxation and Subsidization: Prices be set equal to marginal costs. Consequently, there is revenue short falls from total costs, as both AC and MC are falling with MC < AC. The 'operating loss' would be recovered (subsidized) through non-distortionary taxes by the government, the total amount of which is the area ABCD in Figure 1 above. 

Criticisms:

(i) an inadvertent redistribution of income due to cross-subsidization, 

(ii) income taxes are distortionary, and 

(iii) misallocation of resources.
 
b) The Coasean Two-Part-Tariff: Each consumer would be charged a single price according to P = MC, but in addition would pay a lump-sum or fixed charge for the opportunity to be able to buy any unit of the service as 'entry fee'/ 'user charge'.

Criticisms:

Equal entry fee for all violates the equity consideration.