A natural monopoly usually arises when
A) there are diseconomies of scale in an industry.
B) the government allows unrestricted access to a market.
C) there are large economies of scale relative to the industry's demand.
D) companies band together to form a larger company.

Question

Quizplus · Accepted Answer

A natural monopoly arises when there are significant economies of scale relative to the industry's demand. In such a case, it is most efficient for one company to provide the goods or services rather than multiple firms, as the cost per unit decreases as production levels increase. This results in high barriers to entry for potential competitors. Diseconomies of scale (A) would discourage monopolies as the cost per unit increases as the scale of production increases. Unrestricted access to a market (B) would not necessarily lead to a natural monopoly. Companies banding together (D) to form a larger company can lead to a monopoly, but this is not considered a natural monopoly.

A Natural Monopoly Usually Arises When