Lesson 17

Question 1

natural monopoly

Answer 1

monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable

Question 2

nationalisation

Answer 2

where a privately owned firm or industry is taken into public ownership

Question 3

privatisation

Answer 3

where an enterprise in public ownership is returned to private ownership

Question 4

What are the advantages of a natural monopoly?

Answer 4

greater economic efficiency as there is more scope for productive efficiency because they can better exploit economies of scale. could be dynamically efficient because they would be able to generate SNP and reinvest that into SNP

Question 5

what are the disadvantages of a natural monopoly

Answer 5

a low threat of competition can allow the monopoly to charge higher prices, it could be x-inefficient as a lack of competition reduces incentives to lower excessive stock levels or overstaffing which will lead to higher prices for consumers and lower utility, and it could be dynamically inefficient

Question 6

what does the desirability of a natural monopoly depend upon?

Answer 6

it will depends on the companies objectives, a state owned monopoly will aim to be allocatively efficient whereas a natural private monopoly might aim to profit maximise and therefore charge higher prices. if there is a natural monopoly that is producing a merit good and receiving a subsidy to charge lower prices then that is especially desirable