The Pros And Cons Of Natural Monopolies

A monopoly is a market in which there is only one supplier for the product. In the real world a prefect monopoly is rarely established and monopolies often have one large firm and include a tiny amount of other small firms. A monopoly market is often characterized by profit maximizer, price maker, high barriers to entry and price discrimination. A monopoly can have power in the market because of economies of scale, technological superiority can no substitute goods among other factors.

A natural monopoly is a monopoly whose long-run average cost curve (LRAC) falls continuously over a large range of outputs. What this means is that the cost of production of a good decreases continuously when all factors of production are variable including technology

British Telecom in the United Kingdom could be considered a natural monopoly. The British Telecom maintained the UK telecommunications network in the broadband industry and was a sole supplier for telecommunication services in the UK. Another example can be the National Rail in the UK which owns and maintains the UK rail network. When we analyze these companies it can be seen that most natural monopolies form for goods that are provided by the government or require huge

It can also be defined as an economy where resources are not optimally allocated. The government intervenes in inefficient markets to generate economic fairness and maximize social welfare. Government generally intervenes to correct market failures. The government may sometimes intervene in markets to promote national unity and advancement. There are several ways that the government can intervene to correct market failures, for example, taxation on demerit goods, providing subsidies for merit goods and price controls.

Price controls consist of maximum (price ceiling) and minimum (price floor) prices that are imposed by the government to help either consumers or producers of particular goods. While price controls are introduced by the government to keep the price of a product stable, they also have consequences that make them inefficient and reduce the total welfare in affected markets. This can be further illustrated by two examples: price floors on butter imposed by the European governments to help butter producers and price ceiling imposed on petrol by Chinese government to help