Explain the argument according to which only natural monopolies should not be opened to competition?

Expert Solution

A company with a natural monopoly might be the only provider of a product or service in an industry. Natural monopolies can arise in industries that require unique raw materials, technology or similar factors to operate. A natural monopoly will typically have very high fixed cost.

Examples of natural monopolies are Tap water, Gas network, Electricity, Railway, Broadband networks etc.

Natural monopolies are uncontestable and firms have no real competition. Therefore without government intervention they could abuse their market, power and set higher prices. Natural monopolies often need government regulation.

In short natural monopoly market competition will not work well and so rather than allowing an unregulated monopoly to raise price and reduce output, the government may wish to regulate price and output. Common examples of regulation are public utilities, the regulated firms, the often provide electricity and water services.

Rahul Sunny answered 1 year ago

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