Because of the huge fixed cost of running pipes to everyone’s home, natural gas is a natural monopoly. Suppose demand is Q = 100 – P and marginal revenue is MR = 100 –2Q. Suppose marginal cost is $20, and the fixed cost of setting up the natural gas pipelines is $1,000.

a. Compute the industry outcome (quantity, price, profit, consumer surplus, and social welfare) under unregulated monopoly.

b. What regulatory price maximizes social welfare? Compute the industry outcome (quantity, profit, consumer surplus, and social welfare) under this price. Would this policy be sustainable in the long run?

c. Compute the industry outcome with the laxer regulatory policy of constraining price to be no greater than average cost. Would this policy be sustainable in the long run?