Monopoly control and regulations:

There may be many situations when generation of monopoly power is not desired as it reduces the welfare of the consumers and the production process is not optimal.

If the market size is small relative to the optimal size of plant, we have the case of 'natural monopoly', where market cannot support more than one optimal sized firm. Under these circumstances, the government many intervene either by itself undertaking the operation of the plant or by regulating the price that the private monopolist is allowed to charge. In both the cases, the government has to set the prices or the levels of different prices if price discrimination is practiced.

 
The monopoly price is given by P_M (which corresponds to MR = MC). Since Pm implies excess profit and exploitation of the buyers, the price regulated by the government must be set at lower than P_M. There are two alterative prices, the government can administer:

First, the government may set the price where MC = P, i.e., price OP. At this price, the output will increase from OX_M to OX₁ but still will allow some excess profit.   

Secondly, the government may set a price equal to the average cost, i.e., price = OP₂. This leads to a higher output OX₂ and covers the total cost inclusive of a fair return on the capital. 

Alternatively, the government may apply a price discrimination scheme. This solution has wide applications in the sectors like electricity, gas, railways and other government regulated monopolies. But this entails serious problems of 
equity and redistribution of income and of economic allocation of resources.