Question

Which of the following statements are true about the natural monopoly? Check all that apply.

A) The electricity company is experiencing diseconomies of scale.
B) The electricity company must own a scarce resource.
C) It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers.
D) In order for a monopoly to exist in this case, the government must have intervened and created it.

Answer 1

A natural monopoly is most efficiently run by one producer due to economies of scale, and it occurs when fixed costs are high and the marginal cost of serving additional customers is low. It does not require the firm to own a scarce resource, nor is it solely created by government intervention, though regulation is common. So the correct answer is option c.

Step-by-step explanation:

True statements about a natural monopoly are ones that describe the unique cost structures and market conditions that allow such a monopoly to exist efficiently. Here are the statements from the given options that are true.

• C) It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers. This is because a natural monopoly occurs where there are significant economies of scale. Utilities such as an electricity company can serve the entire market more efficiently than multiple producers, which would lead to duplicative costs.

The following options are not generally true in the context of natural monopolies:

• A) The electricity company is experiencing diseconomies of scale. Diseconomies of scale typically do not apply as natural monopolies benefit from economies of scale over the relevant range of output.
• B) The electricity company must own a scarce resource. Owning a scarce resource is not a requirement for a natural monopoly; it's the economies of scale and the high fixed costs that define it.
• D) In order for a monopoly to exist in this case, the government must have intervened and created it. While it's true that many natural monopolies are regulated, government intervention is not what creates the natural monopoly; it is the result of the cost and market structure.

Answer 2

A natural monopoly arises when economies of scale are large relative to the quantity demanded in the market. The correct statements about natural monopoly are that it is more efficient on the cost side for one producer to exist in this market and in order for a monopoly to exist in this case, the government must have intervened and created it.

Step-by-step explanation:

Economists call this situation, when economies of scale are large relative to the quantity demanded in the market, a natural monopoly. Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place.

For example, once a water company lays the main water pipes through a neighborhood, the marginal cost of providing water service to another home is fairly low. Once the electric company installs lines in a new subdivision, the marginal cost of providing additional electrical service to one more home is minimal. These industries offer example where, because of economies of scale, one producer can serve the entire market more efficiently than a number of smaller producers that would need to make duplicate physical capital investments.

The correct statements about natural monopoly are:

1. It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers.
2. In order for a monopoly to exist in this case, the government must have intervened and created it.