A natural monopoly
A) generally needs to be regulated in order to reduce allocative inefficiency.
B) should be taken over by government and run as a crown corporation.
C) is the best way to produce a given product and should be left alone.
D) will not achieve productive efficiency without regulation.
E) should be broken up into a large number of competitive firms.

Question

Quizplus · Accepted Answer

A natural monopoly occurs when a single firm can produce at a lower average cost than any potential competitor due to economies of scale. While this may lead to lower prices for consumers in the short run, it can also result in allocative inefficiency as the monopolist restricts output and charges higher prices than would occur under perfect competition. Therefore, regulation is often necessary to ensure that the natural monopolist is producing at the socially optimal level of output and price.

A Natural Monopoly