Natural+Monopolies

Natural molopolies ultimately resemble other normal monopolies in their demand, supply, and cost curves, but their creation is slightly different. Industries are said to naturally support a monopoly and are consequently created when either the social cost at an equal output is lower with one firm than with two or more or when only one firm is naturally able to survive or stay in the industry in the long run. In either case, a natural monopoly exists because economies of scale become so extensive that only one firm can be supported by the industry. This is different from normal monopolies because these occur often regardless of the desires of the owners of the firm as to the creation of a monopoly, whereas normal monopolies are created usually as a result of the owners' decisions and desires.
 * NATURAL MONOPOLIES**

In the first case, monopolies occur naturally because the total cost to society is lower than when more firms are present in the industry. Graphically, this is because the firm will be producing at the very bottom of the ATC curve- meaning that at any other point in that industry, firms will be less efficient. In the second case, natural monopolies will occur because only one firm will be able to survive in the industry in the long run, due to forces such as barriers to entry (where something makes it extremely difficult to enter an industry),or other forms of economies of scale. While it is not illegal to have a natural monopoly, since it is naturally occuring, government regulations exist to try to keep competition in the market. These regulations, however, are often ineffective.

Practice problem: Using the picture above, where will the firm produce? (Answers below) a. Q: where MR=MC, P: the demand directly up from the Q, since that is where a monopoly will maximize its profits b. Q: Where D=ATC, P: where D=ATC, since that is the lowest point of cost and the lowest cost to society. c. Q: Where MR=ATC, P: the demand directly up from the Q, since that is where the firm will suffer the least amount of losses.



Comcast cable company has a natural monopoly in Edina because they are the only cable provider in the city, yet they make no effort to stop other firms from entering the market. It's extremely difficult to get into the business of providing cable and Comcast is left with monopoly power.

Xcel Energy is a natural monopoly as well: it is extremely difficult to get into the business of providing energy, so they are one of the few firms to do so. Xcel Energy achieves economies of scale when they produce huge amounts of energy, which entering firms wouldn't be able to do.

Answer to the practice problem: //b: The industry shown will naturally approach and support a natural monopoly at this point.//

For more information about natural monopolies: [|Wikipedia]-Wikipedia gives a detailed definition of natural monopolies. [|Article]-This is a essay about natural monopolies and their economic effects on society. [|Simple Definition]-This site gives a simplified definition of natural monopolies and explains the concept graphically.