If the distribution of water is a natural monopoly, then (i) imultiple firms would likely each have to pay large fixed costs to develop their own network of pipes.
(ii) allowing for competition among different firms in the water-distribution industry is efficient.
(iii) a single firm can serve the market at the lowest possible average total cost.
A) (i) and (ii) only
B) (ii) and (iii) only
C) (i) and (iii) only
D) (iii) only

Question

Quizplus · Accepted Answer

A natural monopoly occurs when a single firm can produce the entire output required by the market at a lower cost than any potential competitor. Therefore, it is not efficient to have multiple firms developing their own network of pipes since these firms would have to pay large fixed costs that could be prohibitive. This is reflected in (i) and (iii). On the other hand, (ii) is not true for natural monopolies because allowing for competition would result in duplicative and inefficient investments in infrastructure, leading to higher costs for customers.

If the Distribution of Water Is a Natural Monopoly, Then