When does a natural monopoly arise
A)when there are constant returns to scale over the relevant range of output
B)when there are economies of scale over the relevant range of output
C)when one firm owns a key natural resource
D)when the government gives a single firm the exclusive right to produce a particular good or service

Question

Quizplus · Accepted Answer

A natural monopoly arises when there are economies of scale over the relevant range of output, which means that as the firm produces more, its average costs decrease. This gives the firm a cost advantage over potential competitors because it can produce at a lower cost per unit. In contrast, constant returns to scale (choice A) mean that increasing the scale of production does not affect the cost per unit, so there is no cost advantage for a single firm. Owning a key natural resource (choice C) may give a firm some advantages, but it does not necessarily lead to a natural monopoly. Finally, government intervention (choice D) can create a legal monopoly, but it is not a form of natural monopoly.

When Does a Natural Monopoly Arise