each household could choose its own water provider, would be terribly costly. The same argument applies to

the idea of having many competing companies for delivering electricity to homes, each with its own set of

wires. Before the advent of wireless phones, the argument also applied to the idea of many different phone

companies, each with its own set of phone wires running through the neighborhood.

The Choices in Regulating a Natural Monopoly

What then is the appropriate competition policy for a natural monopoly? Figure 11.3 illustrates the case of

natural monopoly, with a market demand curve that cuts through the downward-sloping portion of the

average cost curve. Points A, B, C, and F illustrate four of the main choices for regulation. Table 11.3 outlines

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
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