Final answer:
It is false that replacing a monopoly with a competitive industry is always welfare improving. Monopolistic competition and natural monopolies may offer certain advantages, such as greater variety and efficient service provision, which might not exist in a perfectly competitive market. Therefore, the effect of replacing a monopoly depends on the specific market context.
Step-by-step explanation:
The statement that it is always better to replace a monopoly with a competitive industry is false. While monopolistically competitive industries are more frequently observed in the real world and do offer benefits such as greater variety and incentives for product and service improvement, they do not always lead to productive and allocative efficiency.
In a monopolistically competitive market, firms will not always produce at the minimum of average cost, nor will they price their goods and services equal to marginal cost, which are conditions met in a perfectly competitive market. Moreover, the case of natural monopolies, particularly regulated natural monopolies, is an important exception.
Natural monopolies arise due to the cost structure and market demand, typically when fixed costs are large relative to variable costs, leading to declining average costs over a range that satisfies market demand. Therefore, a single firm can efficiently meet the total market demand at a lower cost than if multiple firms were involved.
Splitting up a natural monopoly into a more competitive market structure could increase average production costs and lead to higher prices for consumers. Thus, the concept that replacing a monopoly will always improve welfare does not hold in every scenario, particularly when considering natural monopolies or cases where monopolistic competition provides variety and innovation that might compensate for the lack of perfect competition.