1)

Natural monopoly.

a. Explain in a few words what is a natural monopoly.

b. Is the natural monopoly efficient? Why or why not?

c. If the government forces the natural monopolist to produce a level of output where P=MCP=MC. What is the problem with such a policy?

a) A natural monopoly in this case can be identified as any firm or entity that is in the production of an entire range of output at a very subsidized cost as compared to a case where there would be multiple producers.

b) The natural monopoly tends to be effective since it appears to be having a very stable economies of scale (declining marginal and average cost over the entire output range). In the case where the whole market supply is carried out by two firms, then in such a situation the average cost will be greater than the natural monopoly.

c) Since P=MCP=MC, then the price will not be able to cover the average cost causing the firm to incur very huge losses to a point of going out of business.