The problem of natural monopoly should be solved by
A) doing nothing.
B) cost-plus regulation.
C) exclusive contracting.
D) government ownership.
E) weighing the costs and benefits of each of the regulatory alternatives.

Question

Quizplus · Accepted Answer

Natural monopoly is a market structure where one firm has lower average total cost than any other firm can achieve in the industry, which makes it more efficient for only this firm to supply the entire market. For instance, it may be more cost-effective for only one company to manage the water supply in a city than to have multiple firms constructing their own pipelines. Since natural monopoly has the potential to lead to higher prices, reduced output, and decreased efficiency, it is necessary to use regulatory policies to mitigate its adverse effects. Therefore, weighing the costs and benefits of each regulatory alternative would be the best choice to determine the most effective approach to regulating a natural monopoly.

The Problem of Natural Monopoly Should Be Solved by