A natural monopoly

Question

A natural monopoly

Quizplus · Accepted Answer

A natural monopoly usually arises when there are large economies of scale. This means that as the scale of production increases, the average cost of producing each unit of output decreases. As a result, it becomes more efficient for a single large firm to produce the entire output for a given market than for multiple smaller firms to attempt to compete. This leads to the emergence of a natural monopoly. Government licensing may be required initially to establish the monopoly, but it is not a defining characteristic. Natural resources may contribute to the emergence of a natural monopoly, but they are not a necessary condition. Multiple firms selling differentiated products would not result in a natural monopoly.

A Natural Monopoly