Question

Explain the concept of " natural monopoly".

Answer 1

Monopoly is a market where there is a single seller of a commodity or service in the market. Natural monopoly arises due to the single seller alone being able to supply to the entire market at a very low cost (average total cost). In monopoly, there are entry barriers. In case of natural monopoly, the barrier to entry is due to huge initial investment which results in large economies of scale i.e. the firm being able to produce large amount at a very low average cost. Other firms will not want to enter this market as they will have to incur huge initial investment. While they incur huge start up investment, they may not be able to charge a low price as the already existing firm(monopoly) is supplying the entire market. It is therefore not profitable to enter the market for new firms. natural monopoly may exist in case of public goods like fly over or a bridge. Here the initial investment is huge that results in economies of scale and a single firm is able to provide the good to the entire market.