gas or heating oil to homes may not be able to meet price caps that seemed reasonable a year or two ago.

However, if the regulators compare the prices with producers of the same good in other areas, they can, in

effect, pressure a natural monopoly in one area to compete with the prices charged in other areas. Moreover,

the possibility of earning greater profits or experiencing losses—instead of having an average rate of profit

locked in every year by cost-plus regulation—can provide the natural monopoly with incentives for efficiency

and innovation.

With natural monopoly, market competition is unlikely to take root, so if consumers are not to suffer the high

prices and restricted output of an unrestricted monopoly, government regulation will need to play a role. In

attempting to design a system of price cap regulation with flexibility and incentive, government regulators do

Access for free at openstax.org
11.4 • The Great Deregulation Experiment 271

not have an easy task.
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