A natural monopoly is likely to arise when:
A) the government restricts entry through licensing.
B) patents provide protection of intellectual property.
C) economies of scale exist over the relevant range of demand.
D) a firm controls a crucial input to production.

Question

Quizplus · Accepted Answer

Economies of scale occur when the average cost of production decreases as the quantity of output increases. Therefore, a natural monopoly is likely to arise when a single firm can produce the entire market output at a lower cost than two or more firms could. This situation frequently arises when economies of scale exist over the relevant range of demand.

A Natural Monopoly Is Likely to Arise When