Which of the following best describes a natural monopoly?

• A. A market where government regulation prevents entry of new firms.
• B. A market with many sellers offering identical products.
• C. A market where firms collude to set prices and restrict output.
• D. A market where a single firm can supply the entire market at a lower cost than multiple competing firms due to economies of scale.

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 any combination of multiple firms, primarily due to significant economies of scale.
2. Recall that economies of scale mean that as the firm produces more output, its average cost per unit decreases, making it more efficient for one firm to serve the whole market.
3. Compare the given options to this definition: identify which option aligns with the idea of cost advantages and market supply by a single firm.
4. Eliminate options that describe government regulation, many sellers with identical products (perfect competition), or collusion (oligopoly behavior), as these do not capture the essence of a natural monopoly.
5. Select the option that explicitly states the single firm supplying the entire market at a lower cost due to economies of scale, as this best describes a natural monopoly.