If the distribution of water is a natural monopoly, then which of the following is most likely true?

• A. The government cannot regulate prices or output in this market.
• B. Marginal cost always exceeds average total cost at all levels of output.
• C. There are many firms competing in the market, each with similar cost structures.
• D. Average total cost decreases as output increases over the relevant range of demand.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a natural monopoly: it occurs when a single firm can supply the entire market demand at a lower cost than multiple firms due to economies of scale.
2. Recall that in a natural monopoly, the average total cost (ATC) curve is downward sloping over the relevant range of output, meaning ATC decreases as output increases.
3. Recognize that if ATC decreases with output, marginal cost (MC) is typically below ATC, so MC does not always exceed ATC at all output levels.
4. Note that natural monopolies usually have a single firm dominating the market, so there are not many firms competing with similar cost structures.
5. Understand that government regulation is often possible and common in natural monopolies to control prices and output, so the statement that government cannot regulate is unlikely to be true.