Natural Monopoly Concepts

Flashcards covering key concepts related to natural monopolies and their characteristics.

What is a natural monopoly?

A specific cost structure where the market is more efficient when served by a single firm.

Why does competition lead to inefficiency in a natural monopoly?

Because of large fixed costs of operating and near zero marginal cost of adding an additional consumer.

What are economies of scale?

The average cost falls as output rises.

What are increasing returns to scale?

When increasing the amount of inputs produces more than double the output.

What causes inefficiency in a natural monopoly?

Inefficient duplication of infrastructure and competing firms siphoning off demand necessary to recoup large fixed costs.

What are some examples of natural monopolies?

Utilities like power, gas, and water; U.S. Postal Service (1st class letter delivery).