alleryA natural monopoly arises mainly because:
AThe firm sells a product with many close substitutes
BThe government bans the entry of all competing firms
COne firm can supply the whole market at a lower unit cost
DMany small firms each produce a tiny share of output
Answer & Solution
Correct answer: C. One firm can supply the whole market at a lower unit cost
1. A natural monopoly comes from very large economies of scale.
2. Unit cost keeps falling over the whole range of market demand.
3. So one firm produces the industry output more cheaply than two or more could.
4. Duplicating infrastructure across several firms would be wasteful, e.g. power distribution.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.11_
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