Which of the following is an example of a natural monopoly?

• A. A clothing retail store
• B. A competitive farmers' market
• C. A local bakery
• D. A city's water supply system

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the definition of a natural monopoly. A natural monopoly occurs when a single firm can supply the entire market at a lower cost than any combination of multiple firms, usually due to high fixed costs and significant economies of scale.
2. Step 2: Analyze each option in terms of cost structure and market characteristics. For example, a clothing retail store, a farmers' market, and a local bakery typically have many competitors and do not require huge infrastructure investments that create economies of scale.
3. Step 3: Consider the city's water supply system. It usually involves large fixed costs for infrastructure like pipes and treatment plants, making it inefficient for multiple firms to duplicate these facilities.
4. Step 4: Recognize that because the water supply system has high fixed costs and low marginal costs, it fits the natural monopoly model where one provider can serve the entire market more efficiently than multiple competing firms.
5. Step 5: Conclude that the city's water supply system is the example of a natural monopoly among the given options.