The most expensive part of providing homes in a city with electricity is putting up wires and cables all over town to carry the electricity. Electricity providers are a prime example of natural monopolies. These businesses usually have extremely high start-up costs but have a very low marginal cost of production. Natural Monopolies and Regulation: A natural monopoly is an industry which captures economies of scale at the allocatively efficient quantity resulting in much lower average costs when there is a large single provider.
But since they do not produce the allocatively efficient quantity (where P=MC), they create deadweight loss and are inefficient. Surplus and deadweight loss: Single price monopolies have both consumer and producer surplus. High barriers to entry are the driving force behind giving firms monopoly power.Įfficiency: No, Monopolies price above marginal cost and do not produce at the lowest average cost so they are not allocatively or productively efficient and they have deadweight loss.Įconomies of Scale: Monopolies usually capture economies of scale because the profit maximizing quantity is on the downward sloping portion of their long-run average total cost curve. Long-run Profit: Due to the high barriers to entry, economic profit is possible in the long run.Ībility to Impact Price: Monopoly power gives firms the ability to charge higher prices than would be charged in a competitive market. These actions will increase the firm’s ATC and erode some economic profits. Monopolies may engage in rent seeking behavior (working to pass voter initiatives, lobbying politicians, etc), to maintain a monopoly.
Product Difference: The product is unique.īarriers to Entry: High barriers which prevent any competitors from entering. There are no close substitutes and no competitors.
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