Which of the following is likely to take place if regulators split a natural monopoly into two smaller firms?
A) The number of firms in the market will increase but the market price will be unchanged.
B) The output in the industry will increase.
C) The cost of production in the industry will increase.
D) The market demand curve will become flatter.
E) The total industry profits will increase.

Question

Quizplus · Accepted Answer

The cost of production in the industry will increase because the natural monopoly had economies of scale, which allowed it to produce at a lower cost than smaller firms. Splitting the monopoly into two smaller firms will eliminate these economies of scale, causing their average costs to increase, leading to higher costs of production in the industry as a whole.

Which of the Following Is Likely to Take Place If