In this paper, we discuss the optimal public policy towards two‐part tariff licensing, under the assumption that the government intervenes in licensing by setting an upper limit on the royalty level. Compared with the traditional constraint on licensing, the new derived licensing policy in this paper will bring two kinds of welfare improvement. First of all, when licensing is welfare reducing the new policy can prevent it from happening. Second, when licensing is potentially welfare improving the new policy can take full advantage of its benefits.