Question

Describe an example of a real-world industry or market that would be considered by economists to be a natural monopoly. What characteristics of the industry make it a monopoly? What is the impact of the monopoly power on its customers? Why might government want to regulate natural monopolies? How might such regulation be structured?	0

Answer 1

1. In real life, a market would be considered as natural monopoly if it is the sole provider of goods/services in the entire industry. These industries require unique raw materials or technology to function and are generally protected by the government by restricting entry of new firms in the industry. Also, these firms have such huge start up costs, that it is difficult for other firms to enter the market and compete with them too.

E.g. railways, electricity markets are all natural monopolies

2. Characteristics which make it a monopoly are: There is single firm in the industry; Entry barriers in the industry are too high; products sold are unique in nature

3. Prices charged are high while sales are limited in these markets, as these firms operate for profit maximization.

4. Government would regulate these industries so as to not allow competition in the industry and incentivize the already operating firm to function smoothly in the industry. Also, since the single firm due to economies of scale can produce a larger output a lower average cost as compared to many firms entering the market and competing, it becomes necessary for government to regulate such markets.

5. Regulation can be structured in the form of entry barriers.

The government can do so by granting patents, licences, subsidies etc to the already operating firm to give them an advantage over other firms in terms of costs of operations.