Question

Explain why the natural monopoly arises and why the government’s marginal cost pricing (P = MC) regulation fails for the natural monopoly.

Answer 1

Ans 3. A natural monopoly is a concept where an industry because of high infrastructural cost and high capital involvement and some other entry barriers in the industry leads to supersede the market and restrict the other firms to enter in the market and not able to perform in the market creates a situation of natural monopoly in the economy.
The government's marginal cost pricing i.e. price equals to marginal cost regulation feels for the natural monopoly because even government cannot control the market situation where there is a huge investment involved so for the benefit of the industrialisation and to increase the productivity of the industry it is better to increase the productive investment in the economy.
Government is not able to handle the situation as the industrial investment as it is important in the economy, therefore, the creation of natural monopoly is created as per the condition that they can exist in the economy and government try to maintain the balance in the market but because of huge capital government feels that it is good for the economy and this is the only reason the natural monopolies concept is applicable everywhere in the world or in every economy.