A firm that is a natural monopoly
A) can supply the entire market at a lower average total cost than two or more firms.
B) has very small fixed costs and very large marginal costs.
C) is infrequently regulated because having one firm serve the market is economically sound.
D) cannot make an economic profit if it is not regulated because it must serve a very large customer base.
E) produces the efficient quantity of output when it is not regulated.

Question

Quizplus · Accepted Answer

A natural monopoly occurs when a single firm can produce the entire output of the market at a lower average total cost than two or more firms. This is because the firm benefits from economies of scale, which means that their average total cost decreases as they produce more output. Due to this, having multiple firms compete in a natural monopoly market would result in higher average total costs and inefficiencies. Therefore, having one firm serve the market is economically sound.

A Firm That Is a Natural Monopoly