Question

Provide an example of a natural monopoly and briefly explain why your example meets the economic definition of a natural monopoly. (6 points) HTML Editora B I VA - A - Ix E 11 x X, DE V OG T 12pt Paragra

Answer 1

A natural monopoly will exist in a market if a single firm is in a position to serve the entire market at a very low cost as compared to a market with two or more firms.In a natural monopoly, fixed costs are higher than variable costs . So average cost rises when less output is produced and falls with increase in output.A natural monopoly has high fixed cost but the marginal cost of producing one extra good is constant or small.The utility industry is an example of natural monopoly. Utility services include providing facilities like water, electricity,natural gas and oil in the country.The utility industry meets the economic definition of natural monopoly.In setting up a national network of water pipes ,electricity etc ,involves  high fixed capital cost .The marginal cost of producing one extra unit is small .So it is natural to have just one company providing water, electricity etc.