If a regulatory agency mandates that a natural monopoly charge a price equal to its average cost

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When a regulatory agency mandates that a natural monopoly charge a price equal to its average cost, it is referred to as a price ceiling. At this price, the firm will earn economic profits equal to zero. This is because the price equals the average cost, so there is no excess profit left over after covering production costs. The firm will not exit the industry because it is still able to cover its costs and continue operating. Other firms will not find it profitable to enter the industry because the natural monopoly has already established a barrier to entry.

If a Regulatory Agency Mandates That a Natural Monopoly Charge