UCD Economy Natural Monopoly to Earn Positive Economic Profits Question

1.Since producer surplus contributes to welfare, a welfare-maximizing regulator should allow a natural monopoly to earn positive economic profits.

2.The government is regulating an economy-wide externality and chooses the point where it thinks the marginal cost of abatement curve (MCA) and marginal benefit of abatement curves cross.

If the true MCA is below the MCA curve used by the government to set policy, using the wrong MCA curve above will lead to too little abatement using either a tax or tradeable permits