Question

What is NOT true about a natural monopoly?

1 There are legal market barrier (like patents or copyrights)

2 Even if a second firm joins the market, the second firm will not make positive economic profit

3 It usually has high fixed cost relative to marginal cost

4 There is a large part of ATC curve that is downward sloping

Answer 1

Correct option is: 2.  Even if a second firm joins the market, the second firm will not make positive economic profit.

A natural monopoly comes into existence due to presence of large economies of scale over relevant range of output. Due to large economies of scale, one large firm is able to produce the good & supply it to entire market at a lower cost in comparison to two or more firms can. Natural monopolies are taken up by the government & it legally prevents other firms from producing that good. Example of natural monopolies are public utilities like water, electricity generation, etc. Second firm will not enter the market as cost of starting such type of businesses is very high, prices are regulated by government, to ensure efficiency in the market, only one firm will operate & produce the good or service.