Question

Question 01: Indian railway is an example of a natural monopoly. Briefly explain and justify (400 words)

Question 02: Dubai Metro was introduced on 9/9/2009. Do you think “Dubai Metro” also has the characteristics of natural monopoly? Explain and justify (500 words)

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Answer 1

As per rules and time constraint, I am answering question 1 only. Kindly ask other question separately.

Ans) Natural monopoly is a type of industry where due to high infrastructural cost and high barrier to entry, the maximum number of feasible firms is one. Natural monopoly is allowed because only a single firm can provide goods or services at lower price than with presence of competitors. It is also heavily regulated to protect the customers from unfair prices. Further economies of scale plays an important role in natural monopoly.

Indian railways is one such example of natural monopoly. It was first introduced to India in 1853 under British rule. Indian railways is state owned, it is Asia's largest and worlds second largest rail network. It is divided into 16 zones and have 4,337 operating railway stations.

What makes Indian railways a natural monopoly ÷

• High infrastructural cost associated with laying of railway lines.
• Maintenance and operation of such a large number of railway stations.
• High cost associated with buying and leasing trains.
• Regulation by the government.

Indian railways need high infrastructure for its operation, and it is not easy for any firms to enter the industry. It has extensive distribution of railway line, which further makes it unique and difficult for other firms to enter. With natural monopoly, it is important to have economies of scale. Indian railways can earn profit only if it carries large number of passengers as its running cost is fixed. With entry of many competitors, it will become inefficient to operate by providing customers low cost. Also multiple railway lines will make other lines less efficient, as there is already a great congestion in Indian railways. Further laying of extensive railway tracks acts as barrier to entry for other firms to enter. For a natural monopoly to be successful, it is important for it to earn supernormal profits, otherwise it might lose the interest of firms to operate it. Therefore government allows natural monopoly in the Indian railways.

Further, to protect customers from high prices, government regulate the prices of the railways. As in absence of government regulation, railways might charge arbitrarily.