Draw a pure and natural monopoly graoh and explain the difference as it applies to business...

Draw a pure and natural monopoly graoh and explain the difference as it applies to business types currently in the marketplace. Discuss an issue that currently exists with a real monopolistic business such as, Wal-Mart, oil cartels, or a utility company.

Expert Solution

A natural monopoly arises due to high fixed cost and economies of scale (gas and water supply company, railways). Most natural monopolies are public
utilities. while a pure monopoly is due to the single seller and no close substitute of the product in the market (legal barrier to entry).

From the figure, it can be seen when 300 units are produced when more then one number firms and cost is 17 dollars while if 1000 units are produced by one firm then the cost is 8 dollars so the optimal number of the firm is one. Same is the case for pure monopoly where average cost curve is downward sloping.

The issue faces with these businesses is no such real competition in the market so high chance of customer to be exploited. Therefore, it often needs government regulation and price setting to optimal level so that consumer welfare will increase. it also distorts market forces and leads to misallocation of resources.

Rahul Sunny answered 2 years ago

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