How could a government regulate a natural monopoly? Check all that apply. a. It could buy out the company and operate it instead. It could limit how much the company charges customers. b. It could force the company to offer a different good or service. c. It could insist a company get approval before making certain decisions. d. It could set up new companies to introduce competition into the market. e. It could split the company into smaller firms that serve different customers.

Answer: It could limit how much the company charges customers.

It could insist a company get approval before making certain decisions.

A natural monopoly refers to a situation when one firm can cater to the entire market demand for a product. A natural monopoly can exist in an industry in because of high start-up costs, certain unique raw materials or processes or technologies that are required to run a business. In a natural monopoly, there is only one firm that benefits from very large economies of scale.

A government intervenes or regulates a natural monopoly primarily in order to protect consumer interests.

A natural monopoly has the power to raise the prices of its products as per its wish, since it is the only supplier of the product. Hence the government looks into the cost history of the firm and fixes regulation. The government can also set a price that a firm can exceed over a fixed period of time. This is known as a price cap regulation.

It is assumed that the natural monopoly will function in an economically rational manner. However, the government can insist that the natural monopoly get its approval before making certain decisions. This may occur due to a decision to decrease the quantity of goods produced.