Question

Explain the existence of natural monopolies such as regional electric companies. What are the benefits and costs of allowing such firms to remain monopolies?

Answer 1

Natural Monopoly

Some industries require high start up cost and fixed amounts for conducting business in the industry, this type is called Natural monopoly.If unique raw materials, technology or similar factors are needed to operate then too natural monopoly comes into existence. Such type of monopolies are necessary in the economy therefore governments allow them to exist as they are economically sensible but on the other side put some restrictions and provide regulation ensuring the customers get a good price out of it. The cost of establishing a regional electric company is much more and the capital cost is more but it provides electricity to the people and supply power where required and the government is benefitted on the whole,thus its existence is considered to be valid.

Costs and Benefits of Natural Monopoly

• Sometimes a single company can give a product to the people which many firms cannot give.
• The cost at which the goods are supplied is also fairly less which benefits the people and the government.
• There is no fuss or mess created as only one firm is there in the market.
• Natural monopolies use industry's limited resources efficiently to offer lowest unit price to customers it is advantageous.
• They provide so much that even it is in the benefit of the government to flourish and develop them.
• Also sometimes it is difficult to support more than one player in the industry.
• Being the sole player in the market , they might take advantage of the situation.
• They can restrict the supply of good or services thus inflating the price.
• These natural monopolies needs to be constantly monitored in order to decrease the limitations.