Question

A characteristic of a natural monopoly is that

A. the firm is dedicated to the use of natural resources.
B. there's no government intervention in the market.
C. the firm is supported by the consumer and voted into existence by the voters.
D. adding businesses in competition would increase cost to the consumer.

Answer 1

D

Step-by-step explanation:

A would be incorrect as not all natural monopolies are set up in the primary sector. One such example is a state monopoly in electricity, which is in the secondary and/or tertiary sector.

B would be incorrect as natural monopolies need government regulation to exist and if they are producing where AR=AC, then they will need subsidies.

C would be incorrect as it is not always the case that the firm is voted into existence by voters as it may just be goernment set-up.

D would be correct as having more than one business in the market in question would negate the economies of scales that a natural monopoly has and by increasing competition the cost advantage would lead to higher prices being charged which the consumer will end up paying.