the regulatory choices for dealing with a natural monopoly.

FIGURE 11.3 Regulatory Choices in Dealing with Natural Monopoly A natural monopoly will maximize profits by

producing at the quantity where marginal revenue (MR) equals marginal costs (MC) and by then looking to the

market demand curve to see what price to charge for this quantity. This monopoly will produce at point A, with a

quantity of 4 and a price of 9.3. If antitrust regulators split this company exactly in half, then each half would

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11.3 • Regulating Natural Monopolies 269

produce at point B, with average costs of 9.75 and output of 2. The regulators might require the firm to produce

where marginal cost crosses the market demand curve at point C. However, if the firm is required to produce at a

quantity of 8 and sell at a price of 3.5, the firm will incur losses. The most likely choice is point F, where the firm is

required to produce a quantity of 6 and charge a price of 6.5.
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