A natural monopoly exists when
A)the government protects the firm by granting an exclusive franchise.
B)production can take place with constant returns to scale.
C)there are no rivals in the market.
D)one firm can supply the entire market at a lower cost than two or more firms.
E)the average total cost curve is upward sloping.

Question

Quizplus · Accepted Answer

A natural monopoly exists when one firm can supply the entire market at a lower cost than two or more firms. This is due to economies of scale, where as the firm increases production, its per-unit costs decrease. This makes it difficult for other firms to enter the market and compete, as they would face higher costs than the existing firm.

A Natural Monopoly Exists When