3 What is a natural monopoly Discuss the relative degree and

3. What is a natural monopoly? Discuss the relative degree and timing of utilization and development of technology in (a) a purely monopolistic and (b) a purely competitive system. What is an example of a natural monopoly in your area?

Solution

Natural monopoly is monopoly which is because there are high startup costs. Here Long run average cost curve falls continuously over large range of output.

In case of monopolistic competition There is strong incentive for utilization and development of new technology because growth occurs by differentiation and innovations are part and parcel of differentiation. The firm every now and then tries to introduce new technology. In case of perfect competition there is less pressure for innovation than in case of monopolistic competition. But there is still competition. If a firm doesn\'t introduce new tech it will loose all market to rival firm introducing new tech. Further since there are too many firms there are greater chances that some firm or firms may introduce new tech. However in both monopolistic competition and perfect competition a firm earns only normal profit in long run. Thus incentive to innovate in long run is less than in other market structures.

An example of natural monopoly in our area is water supply department which supplies piped water.