Natural Monopoly 1 What is a natural monopoly 2 Identify one

Natural Monopoly 1. What is a natural monopoly? 2. Identify one regulated, private natural monopoly from which your household buys services. How is the natural monopoly regulated? 3. How do consumers benefit from the government creating and regulating a natural monopoly in this case instead of just allowing competition? (What would happen if there was no monopoly?) ? A 4 5 6 8

Solution

1. In simple words, a natural monopoly is a monopoly which comes into existence because of high fixed costs or set up costs of entering into an industry. Also, natural monopolies can form if a business requires unique raw materials or technology or other unique and rare factor or input. In such circumstances, it is economically efficient to allow natural monopolies to ensure consumer wellbeing. Therefore, governments often encourage such natural monopolies through regulations. For example, electricity utilities require huge setup costs. So, these are natural monopolies and the government protects such natural monopolies to provide maximum benefit to consumers.