If the distribution of water is a natural monopoly, which of the following is true?
(i) allowing for competition among different firms in the water distribution industry is efficient
(ii) a single firm can serve the market at a lower average total cost
(iii) multiple firms will each have to pay large fixed costs to develop their own network of pipes
A)(i) and (ii)
B)(ii) and (iii)
C)(i) and (iii)
D)(i) only

Question

Quizplus · Accepted Answer

If water distribution is a natural monopoly, then it is likely that a single firm can serve the market at a lower average total cost (ATC) due to economies of scale. This means that if multiple firms were to enter the market, each firm would have to pay the large fixed costs of developing their own network of pipes, which would increase their ATC and cause them to be less efficient than the single firm. Therefore, allowing for competition among different firms in the water distribution industry is not efficient and (i) is false. However, (ii) and (iii) are true, as discussed above, so the best choice is B.

If the Distribution of Water Is a Natural Monopoly, Which