When regulating a natural monopoly,the government always sets a price ceiling where marginal cost intersects the demand curve.

Question

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When regulating a natural monopoly, the government sets a price ceiling where marginal cost intersects the marginal revenue curve, not the demand curve. This is because a natural monopoly's demand curve is the market demand curve, which is downward sloping, and setting a price at the intersection of the marginal cost and demand curve could result in the firm earning economic profits. Setting the price at the intersection of marginal cost and marginal revenue ensures that the firm earns zero economic profits and produces at the socially optimal level.

When Regulating a Natural Monopoly,the Government Always Sets a Price