If a natural monopoly is broken up into smaller competing firms, the price of the product will increase because the smaller competing firms will face higher average costs of production than the natural monopolist.

Question

Quizplus · Accepted Answer

Natural monopolies typically exist in industries with high fixed costs and significant economies of scale, meaning the average cost of production decreases as the quantity produced increases. When a natural monopoly is broken up, the resulting smaller firms cannot achieve the same level of economies of scale, leading to higher average costs of production, which can result in higher prices for consumers.

If a Natural Monopoly Is Broken Up into Smaller Competing