Question

Topic: Real-World Monopolies

Describe an example of a real-world industry or market that would be considered by economists to be a natural monopoly.

1. What characteristics of the industry make it a monopoly?
2. What is the impact of the monopoly power on its customers?
3. Why might government want to regulate natural monopolies?
4. How might such regulation be structured?

Answer 1

A Natural monopoly is a monopoly in an industry where a very high infrastructure cost gives a firm often the first entrant an advantage over other potential entrants and hence gives them monopoly power. An example of a real-world industry or market that could be considered as Natural monopoly is the Water Supply of your area.

The most important characteristics of the industry which makes it a monopoly is that it is the sole supplier of that good or sole provider of that services in your area and you have no other choices to choose from. The other characteristics include high barriers to entry in the industry( infrastructural cost) profit maximization.

Since this industry possesses the monopoly powers so it effects the customers by not giving other choice if they are not satisfied by this firm. This firm may also charge the price according to their choice because they have control over market. They can limit the quantity supplied in the market. Though there is not much impact on customers due to government intervention but there could be many effects other than those mentioned above.

Government want to regulate these natural monopolies because in most of the cases these natural monopolies provide basic and essential goods and services which are very important for people's survival and hence to achieve maximum social benefit or to ensure people are not cheated or people do not suffer, government try to regulate these markets.

These government regulations must be structured in such a way that there is no loss to either parties. Government should ensure the price paid by people is fair and it should also ensure that the monopoly industry do not incurred loss due to government regulation.