For a long while, electricity producers were thought to be a classic example of a natural monopoly. People held this view because
A)the average cost of producing units of electricity by one producer in a specific region was lower than if the same quantity were produced by two or more producers in the same region.
B)the average cost of producing units of electricity by one producer in a specific region was higher than if the same quantity were produced by two or more produced in the same region.
C)the marginal cost of producing units of electricity by one producer in a specific region was higher than if the same quantity were produced by two or more producers in the same region.
D)electricity is a special non-excludable good that could never be sold in a competitive market.

Question

Quizplus · Accepted Answer

A natural monopoly occurs when it is more efficient for one firm to produce the entire output of a good or service due to economies of scale. In the case of electricity production, the fixed costs of building power plants and transmission lines are high relative to the variable costs of producing an additional unit of electricity. This means that the average cost of producing electricity decreases as more units are produced. Therefore, it is more efficient for one producer to operate in a specific region, as their average cost is lower than if multiple producers were to produce the same quantity of electricity in the same region.

For a Long While, Electricity Producers Were Thought to Be