An industry in which one firm can achieve economies of scale over the entire range of market supply is a(n)
A natural monopoly
B competitive monopoly
C contestable monopoly
D efficient monopoly
The correct answer and explanation is:
The correct answer is A. natural monopoly.
A natural monopoly occurs when a single firm can produce the entire market supply of a good or service at a lower cost than multiple firms could. This happens because the firm experiences economies of scale over the entire range of market supply. Economies of scale refer to the cost advantages that a firm can achieve due to its size, output, or scale of operations. As a firm increases its production, the average cost of production per unit decreases.
In the case of a natural monopoly, the structure of the industry makes it more efficient for one firm to dominate the market. This often happens in industries where high fixed costs are involved in production or infrastructure, such as utilities like water, electricity, or railroads. A single firm can spread these large fixed costs over a larger output, which results in lower costs compared to multiple smaller firms entering the market.
Natural monopolies are typically regulated by governments to prevent the firm from abusing its market power, as the absence of competition can lead to higher prices or reduced quality of service. Regulation ensures that prices remain reasonable for consumers and that the monopoly doesn’t exploit its position.
In contrast, a competitive monopoly is a contradiction in terms since a monopoly by definition has no competition. A contestable monopoly refers to a market where a monopoly exists but the threat of potential competition can keep prices competitive. An efficient monopoly isn’t a widely recognized term and doesn’t precisely capture the idea of a monopoly that achieves economies of scale over the entire supply range. Therefore, the best term to describe the situation is a natural monopoly.