Question

The reason to regulate a natural monopoly is that a natural monopoly ______________ produce an economically efficient amount of output, ______________ charge a higher price than the perfectly competitive industry, and ______________ have lower average costs than a perfectly competitive industry.

A

Will not; may; will

B

Will; will; will

C

Will not; will not; will not

D

Will not; will; will

E

Will; will not; may

Answer 1

Answer

Option A

Will not; may; will

A natural monopoly has the economics of scale, and economies of scale mean one firm can produce a large quantity of good at a lower cost than the two or more firms. It means a natural monopoly has lower costs than perfectly competitive firms, but if a natural monopoly is not regulated, then it will produce at MR=MC which is less than the efficient output level as the efficient output level is at MC=P. It will charge a higher price if not regulated, so the natural monopoly is regulated.

Ex.

Electricity provider is a natural monopoly

Water provider is also a natural monopoly.