Which of the following firms is most likely to be a natural monopoly?
Municipal Power Light, the local supplier of electricity.
A pharmaceutical company that has the exclusive right to sell a patented drug.
A restaurant that is unable to practice price discrimination and must charge all consumers the same price.
A firm that owns nearly all of the diamond mines in the world.
The correct answer and explanation is :
The firm most likely to be a natural monopoly is Municipal Power Light, the local supplier of electricity.
Explanation:
A natural monopoly occurs when a single firm can supply the entire market’s demand for a good or service at a lower cost than if there were multiple firms competing. This typically happens when the firm experiences significant economies of scale over a large range of output. In other words, the larger the firm gets, the more efficiently it can produce the good or service, and thus, it’s more cost-effective for only one firm to operate in that market rather than having multiple firms.
Let’s go through each option:
- Municipal Power Light, the local supplier of electricity:
- Electricity supply is often considered a classic example of a natural monopoly. The infrastructure required to generate, transmit, and distribute electricity (like power lines and transformers) involves high fixed costs, but the marginal cost of supplying an additional customer is low. Because of this, it’s far more efficient for one firm to handle the entire supply in a given area, rather than multiple firms duplicating the infrastructure. Hence, Municipal Power Light is a natural monopoly.
- A pharmaceutical company with the exclusive right to sell a patented drug:
- This is not a natural monopoly, but rather a legal monopoly or patent monopoly. The company is the sole producer of a particular drug due to the patent protection, but this doesn’t mean it’s the most efficient provider in a natural monopoly sense. Patents grant exclusivity, not cost efficiency related to infrastructure.
- A restaurant that cannot practice price discrimination:
- A restaurant is not a natural monopoly. It operates in a competitive market where many firms can provide similar goods (food). The inability to price discriminate doesn’t create a natural monopoly—it simply indicates pricing strategy.
- A firm that owns nearly all of the diamond mines in the world:
- This firm may hold a dominant position in the diamond market, but it doesn’t constitute a natural monopoly. It’s more of a monopoly by control of resources rather than being driven by economies of scale in production and distribution.
In conclusion, the Municipal Power Light is most likely to be a natural monopoly due to the cost structures and infrastructure associated with providing electricity.