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

• A. A local water supply company
• B. A small-scale organic farm
• C. A clothing retail store
• D. A fast-food restaurant chain

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept 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: Identify the characteristics of industries that typically form natural monopolies, such as utilities (water, electricity, gas) where infrastructure costs are very high and duplicating the network would be inefficient.
3. Step 3: Analyze each option in the problem: a local water supply company, a small-scale organic farm, a clothing retail store, and a fast-food restaurant chain, focusing on their cost structures and market conditions.
4. Step 4: Recognize that a local water supply company fits the natural monopoly profile because it requires extensive infrastructure investment and it is inefficient for multiple firms to build overlapping water delivery systems.
5. Step 5: Conclude that the local water supply company is the best example of a natural monopoly among the options given, while the others operate in more competitive markets with lower fixed costs and less need for exclusive control.