Natural Monopolies Occur When One Producer

What is a Natural Monopoly?

A natural monopoly is a market where a single seller can provide the output because of its size. A natural monopolist tin produce the entire output for the market place at a cost lower than what it would exist if in that location were multiple firms operating in the market. A natural monopoly occurs when a business firm enjoys extensive economies of scale in its production procedure.

Consider the example of heavy industries such as atomic number 26 ore mining or copper mining. These industries involve big fixed costs at their onset. However, these industries are able to savor large economies of scale in the long run. An industry veteran holds a distinct advantage over a new business firm looking to enter the business concern. The sometime firm (natural monopolist) tin can provide the entire market supply at a price much lower than the price the new firm would need to accuse if it wants to stay in business.

Enforced Natural Monopolies

Natural monopolies are frequently gear up by governments not to make profits only to regulate certain markets. For example, during election flavor, many political parties promise to lower the prices of certain necessities in order to capture votes. A relatively easy way to achieve this is to use a government-owned natural monopolist to set the price below the gratis-market price. For example, many European governments set up natural monopolies in manufacturing diverse lifesaving drugs.

Natural monopolies are besides prepare as a way of directing investment within an economy. For instance, natural monopolies in certain heavy industries prevent individual investors from investing in these industries. Some governments restrict foreign private investors from investing in the nation’s heavy industries such as fe, coal, copper, and nuclear fuels.

Examples

Many of the largest energy companies in the world are natural monopolies in their respective markets. Natural monopolies are normally gear up past governments for the provision of necessities such as energy and h2o. Utilities involve high beginning-up costs and require expensive infrastructure investment. Hence, natural monopolies for utilities are easily maintained past governments. However, with the development of cheap nuclear power in contempo times, this may modify in the near future. Telecoms, internet, and national defence are all examples of markets that feel some form of natural monopolies.

Classic examples of natural monopolies:

• Railways
• Electrical utilities
• Social networks
• Search engines

Factors Affecting Degree of Influence of Monopoly Power

1. The elasticity of market place demand – The higher the elasticity of demand, the lower is the monopoly ability of the monopolist.
2. The number of rival firms – If a natural monopolist has a big number of rivals, so it is unable to exert much influence over the market even if it enjoys economies of scale. The rivals may sell slightly differentiated products or even artificially differentiated products in club to capture the marketplace.
3. The degree of interaction among firms in the market – 2 small producers who are not able to compete with the natural monopolist separately may merge in order to enjoy economies of scale. The threat of collusion between potential rivals is another reason why natural monopolists often lower prices below the competitive price.

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone go a world-class fiscal analyst. To continue learning and advance your career, run into the post-obit complimentary CFI resources:

• Market Economy
• Command Economy
• Inelastic Demand
• Constabulary of Supply