If a natural monopoly is likely to occur in some industry, to encourage competition government should prevent the monopoly from arising.
options:
True False
The correct answer and explanation is:
The correct answer is False.
In industries where a natural monopoly is likely to arise, the government typically does not prevent the monopoly from emerging. Instead, the government often regulates the monopoly. A natural monopoly occurs when a single firm can supply the entire market demand for a good or service at a lower cost than multiple firms could. This happens due to high fixed costs and low marginal costs, which make it inefficient for more than one firm to operate in the market. Utilities such as water, electricity, and natural gas are common examples of industries that can develop natural monopolies.
The reason for this inefficiency is that as firms compete in these sectors, the cost of infrastructure and service provision can become so high that it leads to duplicated efforts, resulting in higher overall costs for consumers. The government does not want to encourage multiple firms to operate in these markets because that could lead to unnecessary duplication of infrastructure, which would be costly to consumers.
Rather than allowing multiple firms to compete, which could lead to inefficiencies, governments typically allow the monopoly to exist but regulate it to protect consumers from exploitation. This regulation may involve setting price caps, ensuring that the monopoly does not abuse its market power, and enforcing quality standards. In some cases, the government may even take over the provision of the service to ensure fairness and affordability.
Thus, while competition is generally encouraged in most industries, natural monopolies present a unique case where regulation is a more appropriate response than preventing the monopoly from forming.