How to Identify a Natural Monopoly
What is a natural monopoly?
When there are significant economies of scale in a specific industry, what type of monopoly occurs?
a. Natural monopoly
b. Government-granted monopoly
c. Monopoly power due to the ownership of a patent or copyright
d. Monopoly power due to the ownership of a key production resource
Answer:
A natural monopoly occurs when there are significant economies of scale in a specific industry, making it difficult for other firms to enter and compete. Examples include the water utility and electric utility industries. Thus option A is correct.
A natural monopoly occurs when there are significant economies of scale in a specific industry, meaning that the cost of producing an additional unit decreases as the scale of production increases. This can lead to a situation where one producer can efficiently serve the entire market, making it difficult for other firms to enter and compete.
One example of a natural monopoly is the water utility industry, where the cost of providing water service to additional homes is relatively low once the infrastructure is in place. Another example is the electric utility industry, where the cost of providing electricity to more homes is minimal once the infrastructure is installed.
It is important to note that a natural monopoly is different from other types of monopoly power that may arise from owning a patent or copyright, having control over a key production resource, or being granted a monopoly by the government. Thus option A is correct.