Regulation of a Monopoly Generating Externalities

We consider a monopoly that generates externalities. These depend on either the volume of services provided, or the number of clients, or both. We study the socially optimal prices and propose a regulatory mechanism to decentralize the optimum allocation. The mechanism, which is an gen- eralised version of the price-cap scheme, only requires standard accounting data and straightforward estimates of the social marginal costs/benefits of externalities.