demand curve at an output of 6 and a price of 6.5. This plan makes some sense at an intuitive level: let the

natural monopoly charge enough to cover its average costs and earn a normal rate of profit, so that it can

continue operating, but prevent the firm from raising prices and earning abnormally high monopoly profits, as

it would at the monopoly choice A. Determining this level of output and price with the political pressures, time
constraints, and limited information of the real world is much harder than identifying the point on a graph. For
more on the problems that can arise from a centrally determined price, see the discussion of price floors and

price ceilings in Demand and Supply.

Cost-Plus versus Price Cap Regulation

Regulators of public utilities for many decades followed the general approach of attempting to choose a point

like F in Figure 11.3. They calculated the average cost of production for the water or electricity companies,
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