Natural monopoly - Essay Example

Natural Monopoly A natural monopoly is a special case of a monopoly where substantial economies of scale exist within the industry. The scale of the economies of scale is so extensive that it becomes no more feasible for new entrants to enter the industry until significant investment is done. It can be affirmed that to achieve productive efficiency, the scale of production has to be very enormous often comprising of a high percentage of the total market share for the product in the same industry.

Natural monopolies usually exist in markets where there is a standardized product and massive capital costs predominate, this tends to benefit the first supplier in the market. The barriers to entry are high and common examples include of public utilities such as water services and electricity. In such scenarios it is very expensive to build transmission networks and continue to operate at the cost level of the dominant monopolist. It is argued that in such markets it is more advantageous to have one monopoly producing rather than individual companies producing ineffective products.

Another effective natural monopoly existing in many countries is of the railway companies. They require the setup of railway tracks on the same routes thereby making it highly inefficient for the new entrants. Most of these natural monopolies usually come under the umbrella of government policies and regulations. These monopolies thrive under the support of the government departments as they often work in collaboration with the government agencies to make sure that the costs are reduced and the most cost-effective product is provided to the consumers.

The benefit to the society is weighed against the lack of competition existing in the industry and most of the times the benefit outweighs the need for competition in the market. The government keeps a check on the operations and workings of the natural monopoly to make sure that they serve their purpose of providing the required output at the lowest possible cost. One policy from the government’s end would be to allow the monopoly to maximize their profits by producing at their own output level resulting in a phenomenon known as the deadweight loss.

The government can also ask the monopoly to set the price of the product or service where the average cost curve crosses the demand curve of the product. The above would result in the shift of surplus from the natural monopoly to the consumers thereby expanding output, increasing social surplus and reducing deadweight loss. Another welfare policy would be to encourage the monopoly to not charge any price for their product or service. Nevertheless, the costs would be too high and subsidies would be needed from the government tax revenue to facilitate the continuous production of such good.

(Whitehead) As long as natural monopolies are for the benefit of the society there should be no question to their existence or the dearth of competing firms in the industry, however, a thorough check is required from the government and its agencies to carefully and continuously monitor these monopolies to ensure they do not exploit the consumers because of their apparent power and control. Works Cited Whitehead, Prof. John C., Department of Economics, Appalachian State University. Natural Monopoly 2011. .