Question: It is often said that electricity companies are a natural monopoly, and they are often subject to rate of return regulations.

1. What is a natural monopoly? What makes it likely that the market with be a natural monopoly? Draw a picture illustrating your definition.
2. What is rate of return regulation? Illustrate where a natural monopoly would sell price and quantity both with, and without rate of return regulation.
3. Can you say for certain that this leads an improvement in social welfare? Illustrate your answer by showing the dead weight losses in both situations.

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