Question

What is natural monopoly? Explain why governments tend to regulate the price charged by natural monopolies?

Answer 1

A natural monopoly is a monopoly that requires a high level of investment to set up or needs unique technology or raw materials for the production. These have economies of scale as compared to other firms and grants them the tag of natural monopoly and restricts the new entrant from entering into the industry. For example: Electricity providers, water providers.

The government regulation becomes necessary in the case of natural monopoly because natural monopoly is the sole firm supplying the goods and services in the society, there are no other firms. So, the firms have an advantage in charging the price and restricts the quantity supplied in the market. This becomes favorable for the natural monopoly while unfavorable for the consumers because consumers would be negatively affected, they need to pay higher prices for that good which is supplied by only one firm. So, government intervene in the market and ensure that each and every person gets fair deal from the natural monopoly. sometimes, government itself takes the charge of these goods and services because of high capital or fixed costs.