A natural monopoly exists when
A) diseconomies of scale exist in an industry.
B) one firm can supply an entire market at a lower average total cost than can two or more firms.
C) a firm can engage in price discrimination.
D) the producers in an industry have formed a cartel.
E) a monopoly firm faces a horizontal demand curve.

Question

Quizplus · Accepted Answer

A natural monopoly exists when one firm can supply an entire market at a lower average total cost than two or more firms. This is due to the presence of economies of scale in production, which means that the firm can produce at a lower cost as it produces more. As a result, it can offer lower prices and still make a profit, making it difficult for other firms to compete. Diseconomies of scale (A) would make it more costly for a firm to produce more in the long run. Price discrimination (C) and cartels (D) are strategies used by firms to increase their profits, but they do not necessarily imply a natural monopoly. A horizontal demand curve (E) is associated with perfect competition, not monopoly.

A Natural Monopoly Exists When