The traditional reason for allowing a public utility to operate as a monopoly, subject to regulation of price and output policies, is that the firm is a natural monopoly.

Question

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A natural monopoly occurs when a single firm can supply a product or service to an entire market at a lower cost than what it would be if there were multiple firms operating in the market, due to economies of scale. Public utilities often fit this description, leading to their operation as regulated monopolies to ensure they do not exploit their market power.

The Traditional Reason for Allowing a Public Utility to Operate