![]() In our natural monopoly graph, this is 50 units at $5 per unit. We assume that the total demand is 50 units and if only one firm is producing, then they produce at the lowest point on their Long-Run Average Cost ( LRAC). Three electricity companies (each with their own infrastructure) would naturally pay more than one larger company to provide power to the same number of people thus they are not able to achieve the same economy of scale as one large company. This is due to the fixed cost of the infrastructure involved in supplying electricity to consumers. Having that kind of scale means that a larger-scale producer can produce their goods or services at a lower cost per unit.įor instance, per unit of energy, a larger-scale electricity company can pay less than several smaller-scale companies. They all require substantial economies of scale. There is a specific reason that multiple companies are inefficient in these industries. Additionally, companies also have little interest in taking on these fixed costs themselves, as they’re not likely to lead to profits relative to the high cost of entry. Society as a whole would not benefit in any way if new companies had to build their own infrastructure or take on those other fixed costs. ![]() Unlike in other industries, wherein competition is believed to improve technology and efficiency, having multiple competitors in these kinds of markets is actually less efficient. It’s because airplane manufacturers require a costly input of fixed costs.Įssentially, most industries that have a high infrastructure development cost tend to start as natural monopolies. This makes it, technically, a “duopoly” (just two businesses in one industry). In none of these cases is it particularly viable to have multiple utility providers in one industry. UtilitiesĮlectricity requires grids and cables water services and gas both require pipelines. This can create congestion on roads, making it not only economically but also logistically inefficient. Like railroads, having multiple bus companies in a particular area does not make sense. for the same purpose-and is much too high an investment to be financially practical. Simply, it rarely makes sense to have multiple sets of railroad tracks, stations, etc. This is a very well-known example, often used as the quintessential model of a natural monopoly. Natural Monopoly ExamplesĮxamples of the kinds of goods or services that tend to involve natural monopolies include: 1. ![]() Rent, for example, is a fixed cost.) Natural monopolies are especially common when a good or service requires very large-scale infrastructure to function. (Fixed costs are those that remain the same regardless of the number of goods or services produced. This generally happens when the industry involved has extremely high fixed costs. Similar Posts: Natural Monopoly DefinitionĪ Natural Monopoly occurs when it makes the most sense, efficiency-wise, for only one firm to exist in a given sector. ![]()
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