![]() ![]() “Such situations occur usually in case of utilities or where a market can support only one producer (because the decreasing returns to scale make the optimum plant size large in relation to the demand) or where long-range average total cost is declining with higher output throughout the range of the possible demand.” “Situation where one firm (because of a unique raw material, technology, or other factors) can supply a market’s entire demand for a good or service at a price lower than two or more firms can.” Capital costs (startup costs) as well as maintenance costs (fixed costs) are strong deterrents for potential competitors.Īccording to, a natural monopoly by definition is: Natural monopolies do not exist as a result of hostile takeovers, consolidation or collusion. However, they are usually closely monitored to make sure there is no abusive monopolistic-type behavior in which consumers might fail to get a fair deal. Governments allow these natural monopolies to exist because they make economic sense and are in the best interests of its citizens. A common example is water distribution, in which the main cost is laying a network of pipes to deliver water.” Natural monopoly – government oversight The Economist’s glossary of terms says that a natural monopoly occurs: “Because it is more efficient for one firm to serve an entire market than for two or more firms to do so, because of the sort of economies of scale available in that market. They may also arise in industries were unique raw materials and/or technology are required. ![]() Natural monopolies exist where fixed costs and/or startup costs are extremely high. If there is just one water company in a town or region, the cost per customer is usually lower than would be the case if there were rival suppliers. Water distribution, for example, requires digging up huge areas or ground and laying down a vast network of pipes to deliver water to people’s homes, businesses, golf clubs, parks, and other entities. Natural monopolies are common where expensive infrastructure has to be installed and maintained. A natural monopoly exists when it makes more economic sense for just one company to supply the whole market compared to having two or more competitors, mainly because of the economies of scale that are available in that market. ![]()
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