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

If the distribution of water is a natural monopoly, it means that the industry exhibits economies of scale, and a single firm can produce the output at the lowest possible average total cost. Thus, iii) is correct.

However, allowing for competition among different firms in the water-distribution industry will not be efficient because multiple firms would each have to pay high fixed costs to develop their network of pipes, resulting in duplication and higher costs for consumers. Hence, ii) is incorrect.

On the other hand, i) is correct since multiple firms would have to pay large fixed costs to develop their network of pipes. Therefore, the best choice is C, i) and iii) only.

If the Distribution of Water Is a Natural Monopoly, Then