Natural Monopoly Problem
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What is a natural monopoly and what has happened to natural monopolies in recent years? Explain. Under which market structure does your type of business fall? Explain your answer giving the advantages and disadvantages of such a market structure.
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Natural Monopoly: example (telecommunications company)
What is a natural monopoly and what has happened to natural monopolies in recent years?
A natural monopoly is a special type of monopoly. Recall that a monopoly exists when a market consists of one producer. As a result the market demand is the demand curve facing the producer. We say a market is characterized by a natural monopoly structure when there are decreasing average costs over the entire range of market output. The interpretation of this is that the more a firm produces, the more its average costs fall. Faced with this falling average total cost curve, we have a situation of increasing returns to scale and this is the argument for the natural monopoly. From an efficiency perspective it makes more sense to have one firm producing all the output for the market because one firm can produce the market output at a much lower cost than could a number of competing firms. Below is an image from Schiller's Economy Today text.
Since average costs are decreasing the marginal costs are always below the ATC curve over the range of output for the market. In addition to low MC's and falling ATC's (i.e. economies of scale), natural monopolies are typically characterized by high fixed costs. The intuition is that it costs a lot to start up but once the capital ...
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