natural monopoly

• Examples of natural monopoly markets include utilities such as water distribution and internet distribution
• Natural monopolies are characterized by extremely high startup fixed costs.
• The long-run average cost curve for a natural monopolist is downward sloping due to economies of scale
• Steps in the process of a natural monopoly's cost structure and economies of scale

  1️⃣ High fixed costs lead to high total costs

  2️⃣ Enormous potential for economies of scale

  3️⃣ Downward sloping long-run average cost curve

  4️⃣ Minimum efficient scale at high quantity
• Economies of scale in a natural monopoly are fully exploited at the minimum efficient scale (MES) point.
• Why is competition undesirable in a natural monopoly market?

  Wasteful duplication of resources
• The first firm to enter a natural monopoly market gains a significant economies of scale
• Competition in a natural monopoly market leads to productive inefficiency.
• Match the concepts with their characteristics in a natural monopoly:

  Economies of scale ↔️ Downward sloping LRAC

  Productive inefficiency ↔️ Competition reduces output

  Allocative inefficiency ↔️ Price exceeds marginal cost

  Regulation ↔️ Lower prices and higher output
• Where does a profit-maximizing natural monopolist produce?

  MR = MC
• Supernormal profit for a natural monopolist is represented by the area where average revenue exceeds average cost
• A natural monopolist, if unregulated, charges high prices and produces low quantities compared to competitive outcomes.
• Why do regulators intervene in natural monopoly markets?

  To lower prices
• Regulation in a natural monopoly aims to achieve allocative efficiency
• When a natural monopolist is regulated at the allocatively efficient point, it makes subnormal profit.
• What type of subsidy is often provided to a regulated natural monopolist?

  Per unit subsidy
• The subsidy provided to a natural monopolist is equal to the loss per unit
• State-run natural monopolies are common because they require less regulation.
• What is the ultimate goal of regulating a natural monopoly?

  Societal welfare