What is a Natural Monopoly?
Natural Monopoly is something that exists when there is a scope for the exploitation of the economies of scale to happen over a very large quantity of the output.
The scale of production that would be seen to achieve productive efficiency would be a greater percentage of the complete market demand for the product in the industry.
These are the monopolies that are seen to be in association with industries with a high ratio of fixed to variable costs that are seen. You may see that the fixed cost that is involved in the national distribution network would be much more than that. But you can also note that the marginal variable cost that is involved in the supply of the extra units would be small.
This way you will notice that the average total cost would decline as the rate would increase for production. This happens because of the fixed costs that are spread over a very high level of the outputs.
For Example
Let us take a good example of the telecommunications industry. It has been thought in the past that it was a natural monopoly. It was thought that like in the case of the water and railways, production by more than one company would result in too many problems.
This way there could be inefficient production that is happening. It could be in the pipelines or the cables. But the perception of the natural monopoly is now being changed very slowly.
This is because of the development of technology these days that the traditional barriers are slowly changing. This way entry into the market is not as troublesome as it was in the past.
Economics Assignment Help
Let us take the case of the telecommunications industry in the United Kingdom. There was British Telecom which had to face huge competition from the other telecom service providers. This happened in the 1990s.
This was the same in the case of the mobile phone service and also the cable services. This brought about many changes in turn. These included the industry regulator (OFTEL) that had to see a change in their roles.
The new role of the regulator now is to see that there is the introduction of more competition in the market. Apart from this, they are also trying to ensure that they also ensure proper policing in order to give fair competition among the service providers. This is a very important thing to be done.