Natural monopolies occur when a single or a few firms can take advantage of economies of scale and supply the entire industry output.
A) True
B) False
C) Uncertain

Question

Quizplus · Accepted Answer

Natural monopolies occur due to high fixed costs and low marginal costs. As the firm increases its output, the average cost per unit decreases due to economies of scale. Therefore, it becomes difficult for new firms to enter the market and compete with the existing firm, which prohibits competition and creates a monopoly.

Natural Monopolies Occur When a Single or a Few Firms