Natural Monopoly

Topics: Economics, Market failure, Telephone Pages: 2 (803 words) Published: August 23, 2007
As per Wikipedia, "natural monopoly" is defined as "an industry is said to be a natural monopoly if one firm can produce a desired output at a lower social cost than two or more firms—that is, there are economies of scale in social costs. Unlike in the ordinary understanding of a monopoly, a natural monopoly situation does not mean that only one firm is providing a particular kind of good or service. Rather it is the assertion about an industry, that multiple firms providing a good or service is less efficient (more costly to a nation or economy) than would be the case if a single firm provided a good or service. There may, or may not be, a single supplier in such an industry. This is a normative claim which is used to justify the creation of statutory monopolies, where government prohibits competition by law. Examples of claimed natural monopolies include telecommunications, water services, electricity, and mail delivery. Some claim that the theory is a flawed rationale for state prohibition of competition." A natural monopoly is a company that provides a utility service to an area. It incurs the setup costs, it lays all the necessary cables, and it purchases the hardware and software needed to run such an enterprise. Last, it hires a group of people from various industries to keep the service running. However, it is not the company that is a natural monopoly but the service itself. With the support of the provided definition and of the textbook it would be too costly for two companies to establish a service such as electricity in any given area. This is why it is necessary to keep these services excluded to one company in large or small areas. The electrical company for the most part will provide service to a larger area then a telephone company. This is why in many areas there will be one electrical company whereas two or three telephone competitors may have been established. In addition, in the instance of an...
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