Which of the following is a characteristic of a natural monopoly?

• A. Free entry and exit in the market
• B. High fixed costs and economies of scale over the entire market demand
• C. Perfectly elastic demand curve for the firm's product
• D. Many firms competing with identical products

Answer: (B)

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 high fixed costs and significant economies of scale.
2. Recall that in a natural monopoly, the cost structure is such that average total costs decline over the relevant range of output, making it inefficient for multiple firms to operate.
3. Analyze each option by comparing it to the characteristics of a natural monopoly: free entry and exit is typical of competitive markets, not natural monopolies; perfectly elastic demand applies to firms in perfect competition; many firms with identical products describe a perfectly competitive market.
4. Identify that the characteristic 'High fixed costs and economies of scale over the entire market demand' aligns with the definition of a natural monopoly because it explains why one firm dominates the market.
5. Conclude that the correct characteristic of a natural monopoly is the presence of high fixed costs and economies of scale that make a single firm more efficient than multiple competing firms.