For a natural monopoly to exist,
A)a firm must continually buy up its rivals.
B)a firm's long-run average cost curve must exhibit diseconomies of scale beyond the economically efficient output level.
C)a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of market demand.
D)a firm must have a government-imposed barrier.

Question

Quizplus · Accepted Answer

A natural monopoly exists when a single firm can produce the entire output of the market at a lower cost than any potential competitor. This can occur when there are economies of scale throughout the relevant range of market demand, meaning that as the firm produces more, its average costs decline. This allows the firm to charge a lower price than potential competitors and still make a profit, effectively driving them out of the market. Therefore, option C is the correct answer. Option A is incorrect because continually buying up rivals would lead to a monopoly, but not necessarily a natural monopoly. Option B is incorrect because diseconomies of scale would lead to higher average costs as the firm produces more, making it less likely to be a natural monopoly. Option D is incorrect because while government-imposed barriers can contribute to a monopoly, they do not necessarily create a natural monopoly.

For a Natural Monopoly to Exist