CIMA BA1 · Chapter 8 · Question 8 of 9
A natural monopoly is most likely to arise when:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Economies of scale are so large that one firm can supply the whole market at a lower average cost than two or more firms
Explanation
In a natural monopoly, such as a water or electricity distribution network, average costs keep falling over the whole range of market output. Duplicating the infrastructure would be wasteful, so a single supplier is most efficient. Such firms are usually regulated.
More Market failure, externalities and competition policy MCQs
- Q1A pure public good is characterised by being:
- Q2Where the production of a good creates a negative externality such as pollution, a free market will tend to:
- Q3Which of the following is generally treated as a merit good?
- Q4A Pigouvian tax intended to correct a negative production externality should ideally be set equal to:
- Q5In the market for used cars, sellers know more about the quality of the cars than buyers do. This is an example of: