Question

Which one of the following is CORRECT in the context of a natural monopoly?

• A. Monopoly arises because one key input is a precious natural resource.
• B. Total fixed cost is substantially larger than the total variable cost.
• C. Government does not allow other producers to produce the product.
• D. Indian Railway is an example of such a monopoly.

Hint:

Natural monopolies often have large fixed costs, like infrastructure, which makes it inefficient for multiple firms to operate in the same market.

Answer 1

The Correct Option is B

Step 1: Understand a natural monopoly.
A natural monopoly occurs when a single firm can supply the entire market demand at a lower cost than multiple firms. This happens because of high fixed costs and low variable costs, creating a situation where it is more efficient for only one firm to produce the good or service.
Step 2: Explanation of the options.
- Option (A) is incorrect. While monopolies can arise from limited natural resources, this is not a defining characteristic of a natural monopoly.
- Option (B) is correct. A key feature of a natural monopoly is that the firm experiences high fixed costs (such as infrastructure costs) and relatively low variable costs. This means it is more efficient for one firm to produce the good or service.
- Option (C) is incorrect because natural monopolies arise from cost advantages, not from government restrictions.
- Option (D) is incorrect. While Indian Railways is a government-owned enterprise, it does not represent a natural monopoly due to its monopoly status being primarily driven by governmental decisions rather than cost structures.
Final Answer: \[ \boxed{\text{Total fixed cost is substantially larger than the total variable cost.}} \]