natural monopoly

what is a natural monopoly

what characteristics do natural monopolies have

huge fixed costs

enormous potential for economies of scale

rational for 1 firm to supply the entire market (competition is undesirable)

competition would result in wasteful duplication of resources and non exploitation of full economies of scale (allocative and productive inefficiency)

why is there enormous potential for economies of scale

because it will take a very large quantity to minimise average costs, due to fixed cost and total cost being extremely high

the long run average cost curve is…

downward sloping

what is quantity like at the minimum efficient scale point where all economies of scale are fully exploited

very high

why is competition in a natural monopoly undesirable

because it would result in a wasteful duplication of resources because the first firm to enter the market will have the economies of scale advantage, allocative inefficiency will take place

why would economies of scale not be fully exploited if there was competition

there will be productive inefficiency because firms will not be the greatest size possible if there is competition compared to if they are a monopoly

in this market, a natural monopoly is positive as it results in…

productive and allocative efficiency

lrac diagram natural monopoly

natural monopoly diagram

what would be the point of regulation

AR = MC

what will happen to quantity as a result of regulation

increase

what will happen to price as a result of regulation

decrease

what is the problem with natural monopolies being regulated at ar = mc

average cost is higher than average revenue, so subnormal profit is being made

natural monopolies being regulated diagram

what is done when a private natural monopolist is being forced to produce at ar = mc

a subsidy is given to cover the losses

the subsidy given is equal to the…

loss per unit