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This situation, when economies of scale are large relative to the quantity demanded in the market, is called a natural monopoly. Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place. Once the main water pipes are laid through a neighborhood, the marginal cost of providing water service to another home is fairly low. Once electricity lines are installed through a neighborhood, the marginal cost of providing additional electrical service to one more home is very low. It would be costly and duplicative for a second water company to enter the market and invest in a whole second set of main water pipes, or for a second electricity company to enter the market and invest in a whole new set of electrical wires. These industries offer an example where, because of economies of scale, one producer can serve the entire market more efficiently than a number of smaller producers that would need to make duplicate physical capital investments.

A natural monopoly can also arise in smaller local markets for products that are difficult to transport. For example, cement production exhibits economies of scale, and the quantity of cement demanded in a local area may not be much larger than what a single plant can produce. Moreover, the costs of transporting cement over land are high, and so a cement plant in an area without access to water transportation may be a natural monopoly.

Control of a physical resource

Another type of natural monopoly occurs when a company has control of a scarce physical resource. In the U.S. economy, one historical example of this pattern occurred when ALCOA—the Aluminum Company of America—controlled most of the supply of bauxite, a key mineral used in making aluminum. Back in the 1930s, when ALCOA controlled most of the bauxite, other firms were simply unable to produce enough aluminum to compete.

As another example, the majority of global diamond production is controlled by DeBeers, a multi-national company that has mining and production operations in South Africa, Botswana, Namibia, and Canada. It also has exploration activities on four continents, while directing a worldwide distribution network of rough cut diamonds. Though in recent years they have experienced growing competition, their impact on the rough diamond market is still considerable.

For some products, the government erects barriers to entry by prohibiting or limiting competition. Under U.S. law, no organization but the U.S. Postal Service is legally allowed to deliver first-class mail. Many states or cities have laws or regulations that allow households a choice of only one electric company, one water company, and one company to pick up the garbage. Most legal monopolies are considered utilities—products necessary for everyday life—that are socially beneficial to have. As a consequence, the government allows producers to become regulated monopolies, to insure that an appropriate amount of these products is provided to consumers. Additionally, legal monopolies are often subject to economies of scale, so it makes sense to allow only one provider.

Questions & Answers

what is duopoly
Femi Reply
it's a state where two people control over a market...
Okonkwo
great
jean-renel
why ppf is downward
Ahmad Reply
i didn't understand
Fatima
The PPF is downward because it shows the the unequal opportunity cost ratios existing in the allocation of resources in the production of two major goods/services in a given economy
Elvis
due to opportunity cost.
samson
this is because goods are sacrifice for the production of the other.
Avuwada
Weldon question and good answer . in my opinion when you allocate some more resources for production of one good among two.
Azizullah
any one what is the difference between need and want?
Azizullah
trends in microeconomics
JOSEPH Reply
Worked out examples of calculating the elasticity of supply
Black Reply
briefly describe the term business cycle
Linda Reply
these are the different economic trends observed by an economy at a given time period. we have the slump,recession, recovery and boom
Betole
saran has decided always spend one 4th income on his clothes what is income elasticity of demand in hindi
Saba Reply
income elasticity is 4
Avuwada
what is diminishing returns?
diminishing returns states that as more variable in put is bing employed on a fixed factor marginal product increase attains maximum and falls certeris paribus.
Avuwada
The law of diminishing returns is the a phenomenon that happens when you gain less satisfaction or in another word less marginal utility when you keep on consuming the same thing over and over again. The more you have of something the less desirable it becomes .
sassia
My first post was about the law of diminishing marginal utility, it was meant for another post .
sassia
however to be precise the law of diminishing returns is used to refer to a point at which the level of profits or benefits gained is less than the amount of money or energy invested.
sassia
or you can refer to the text it is mentioned that: "the law of diminishing returns    , which holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. "
sassia
Diminishing returns states that when more and more variable inputs are being employed on a fixed input, total product and marginal product increases initially attains maximum and falls (certeris paribus) .
Avuwada
What is monopoly
benzi Reply
nothing
Its when one firm controls the entire market and is the price setter
aaa
Define indifference curve
mama Reply
a combination of two commodities which a consumer consume that gives the same level of satisfaction.
samson
what is indifferent curve
Sushmi Reply
it defines we must follow theorie.
Do
graph showing perfectly elastic demand
JASON Reply
an price change demand will fall to zero
Rumbidzai
This only applies to commodities with perfect substitutes,in this situation a small increase in price will lead to no demand but a small decrease in price will lead to more demand.
Wanga
what is market equllibrium
sahel
income elasticity coefficient of demand between high and low income individuals
Lawrence Reply
not clear
john
how will the income elasticity coefficient of demand for slice of cake differ between the high and low income individuals?
Lawrence
what is Substantial effect ?
shiva Reply
help me solve this please Qd=90-2P Qs=sqr(P)-3
Paul Reply
set equal to each other and solve for P. +3 then square both sides
Nelsonomics
I think you have a problem with the#s
Nelsonomics
what are the importance of studying economics
agnes Reply

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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