In markets where minimum efficient scales are very high relative to demand, government often steps in to regulate. Firms in such markets are usually legally protected from competition but often seem...

In markets where minimum efficient scales are very high relative to demand, government often
steps in to regulate. Firms in such markets are usually legally protected from competition but
often seem to be productively inefficient. Explain why this is puzzling. How can the puzzle be
resolved, if at all? What are the main alternative approaches? Discuss briefly the advantages and
disadvantages of each.
Answer:
Natural monopoly market is perfect example of markets where minimum efficient scales are very
high relative to demand. Under this type of market, economies of scale (i.e. fall in long run
average cost) are realized over the entire significant range of...