What is the relationship between economies of scale and a natural monopoly?
What will be an ideal response?
In those extreme cases where there are extensive economies of scale across the full range of potential output for market demand, it may be most economical for only one firm to supply the entire market. Large expenses associated with plant facilities may be difficult to secure. Existing consumer loyalty can also create economies of scale issues. In this case one firm, rather than two or more firms, would have declining average costs across the entire range of market demand and be the lowest cost producer. The single firm would be characterized as a natural monopoly.
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Suppose the government imposes a per unit tax on an item whose production process creates a negative externality. Suppose the tax is exactly the value of the marginal externality cost. If the government now uses the tax revenue to clean up pollution from this process, the market will:
a. have internalized all costs and benefits. b. be inefficient. c. be destroyed. d. not have failed. e. be subject to obligatory controls.
In perfect competition, an economic profit can be earned
a. only in the long run b. only if the firm is efficient c. only in the short run d. never e. always