What is a ‘natural monopoly’
A natural monopoly is a type of monopoly that exists as a result of high fixed or start-up costs of doing business in a particular industry. In addition, natural monopolies may arise in industries where require a unique raw material, technology, or other similar factors. As it is economically reasonable to have some monopolies, such as these, the government allows them to exist, but provide the regulation, providing the consumers a fair deal.
The penetration of the ‘natural monopolies’
Natural monopoly, as the name implies, is a monopoly that arises not because of collusion, consolidation or hostile takeovers. Instead, natural monopolies occur when a company uses the high entry barriers in the industry to create a “moat” or a protective wall around their operations.
Utilities is an excellent example of a natural monopoly. The cost of preparation wanted to produce electricity and deliver it to each household can be substantial. This cost of capital is a strong deterrent to potential competitors. In addition, society can benefit from the presence of natural monopoly as it is, because several utility companies operating in the same industry overleverage available resources.
The pros and cons of natural monopolies
Natural monopolies occur because of high cost industrial structure — in most cases, one firm can supply the product or service at a lower cost than any potential competitor, and that will serve the entire market. It makes purely natural monopolies are very rare, but they exist, and often as a single player in the industry. But just because a company operates as a natural monopoly clearly does not mean that it is the only company in the industry.
Because of natural monopolies and efficient use of limited resources in the industry to offer the lowest prices group of consumers, it is beneficial in many situations have a natural monopoly. In fact, successful natural monopolies, such as railway companies, is so effective that it’s actually in the interest of the government to help it flourish. Further, often the industry can’t support two or more large players and a competitive market with the unique resources and high cost structure is unsustainable.
Companies that implement natural monopolies sometimes use advantages. For example, monopolies can restrict the supply of goods or services, thereby inflating prices. Train companies can increase prices of the goods or to raise prices for passenger tickets, because it is the only company offering this kind of transport.
Regulation Of Natural Monopolies
There are instances when the person or Corporation behind natural monopolies is taking part in behavior that abuses his market position. In such cases, the market often call on the government to regulate. Regulation typically occurs when the government believes that the monopoly acts against the public interest. People are calling for the Rules often want to limit the possible abuse of power by monopolies to competition (in some cases, the potential competitor will ask for government intervention) or to stabilize the market.