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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 trade by batter
Iko Reply
trade involves the transfer of good or services from one person to another, often in exchange for money.
musadique
Now trade by batter :it may define as form of trading in which good are exchange directly for other goods without the use of money as medium of exchange
musadique
is it good to trade with something with a value but given something which has no value
sandra
trade in batter means the exchange of goods and services without using money
Maa
mention six factors that explain efficiency and productivity of labour
fanelchainz Reply
mention six factors that explain efficiency and productivity of labour
bohvy
factors that explain efficiency of labor are 1.population, 2.technology, 3.education, 4.working environment, 5.incentives (tax holidays) and 6.religious or cultural beliefs.
Solomon
What is demand
SoFIA Reply
is the abulity and willingness of a consumer to purchase goods and services at a particular peeiod of time in a given price
Fadhil
what is a central bank
Fadhil Reply
what is elastic
fadoju Reply
how is equilibrium defined in financial market?
infinity Reply
what is the definition of money
infinity
Money is define as anything that is generally acceptable as a means of exchange nd settlement of dept
Simeon
what is elastic
fadoju
what is demand and supply
Osman
demand is ability of a consumer to purchase a particular good at a particular time
Maa
supply is the ability of a person to be able to provide his costumers with what they need
Maa
how do choices end up determining what, how and for whom goods and services are produced
Ayesha Reply
They end up by using the scale of preference
Maa
there are 10 000 seats available for the Wimbledon tennis Championships. the price per ticket is fixed by the organisers. the supply of seats is thus: A. completely elastic B. completely inelastic C. elastic D. unitary elastic E. elastic which option is the answer?
Esihle Reply
what is international trade
Naomi Reply
the trade between two or more countries outside the territory of own country
Mukeem
it's an international trade
Ivan
Multilateral trade it is
Antony
how do monopolistic firm make profit in the short run and long run
Ediga Reply
oligopolistic competition is known to have a kinked demand curve .why there is such a tease my in oligopolistic form only
Ediga
please can anyone help me in econs
Oppong
Manuel in which context
Daizy
please in utility
Oppong
what is demand ?
Tonight Reply
The amount of some goods or services consumers need to purchase
Adu
The amount of goods or services that consumers are willing and can afford to purchase.
Ivan
it is goods and services consumers are willing and able to buy at given price over a given period of time
Rebecca
as quantity of good and service that a consumer is willing and able to purchase at a given price and at the particular market price.
MOHAMMED
The amount of goods and services consumers are able and willing to buy and pay for at a given price and at given point in time.
Solomon
refers to the quantity of goods and services that customers are willing and able to purchase at various prices over a period of time
Ryt
Demand may define as goods and services which a consumer is willing to buy at a given price over a perticular market price
Osman
what are subsidies
Yaya Reply
how do trade unions deal with subsidies
Yaya
bro can you explain decision making
WhatsApp
Decision making is a process to use your limited resources for best productive purpose.
Dipam
explain why an increase in national income may not always lead to improvement in economic wellbeing of all the citizens?
Mendo
How many types of labour do we have pls
ROA
two
nabil
skilled and unskilled labour
nabil
Thanks 🙏
ROA
what are the factors that affects efficiency of labour ?
nabil
What are tools of economics analysis
Adu
Adu Tumwah,,, The tools of economics analysis are; Charts, graphs, equations, table, arithemetic mean, etc.
Dennis
Subsidies are payments made by the government to the producers of goods and services
Daizy
what is the marginal revenue if p=10-2q
Karen Reply
what's the difference between demand goods and supply gooda
Spiff Reply
why is 2% the optimal inflation rate in many countries
Spiff
why is 2% the optimal inflation rate in many countries
Spiff
what's inflation
Thando Reply
a general rise in the prices of services and goods in a particular country
Spiff
why is 2% the optimal inflation rate in many countries?
amina
resulting in a fall in the value of money,,
Spiff
for example
Spiff
Inflation is the continuous rise of price of goods and services in a nation
Oluchi
persistent increase in the general price level
Anyere

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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