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CA Foundation · Business Economics · Price Determination in Different Markets

Which of the following is a source of a natural monopoly?

A natural monopoly arises from large economies of scale, which let a single firm supply the entire market at lower average cost than multiple firms could. Public utilities such as electricity distribution are typical examples. Patents and import bans create legal barriers rather than natural ones.

  1. AGovernment ban on imports of a product
  2. BLarge economies of scale so that one firm can supply the whole market at lower average costCorrect
  3. CPatent granted for a new invention
  4. DCollusion among several firms to fix price

Explanation

A natural monopoly arises when economies of scale are so large that a single firm can serve the entire market at lower average cost than several firms, as in electricity distribution. Patents and import bans create legal or artificial monopolies, and collusion is a cartel, not a natural monopoly.

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