If government officials break a natural monopoly up into several smaller firms, then the average costs of production will _____ (increase, fall)

• If government officials break a natural monopoly up into several smaller firms, then the average costs of production will increase.

A natural monopoly is efficient only as a single firm operating in the market. This is because there are very high fixed costs and usually, this type of market requires costly infrastructure. Additionally, the initial investment is also very high. The main characteristic of a natural monopoly is declining average cost of production. That is to say, the natural monopolist will be able to achieve a higher output at lower unit costs if it is the only firm operating in the market. Due to this, if more firms are allowed to enter the market or if the monopoly is broken down into smaller firms, the average cost of production will increase.