Natural Monopolies??

Question 1

What

Answer 1

A special case where one large business can supply the entire market at a lower unit cost contrasted with multiple providers

Question 2

Why do they exist - for example, as a result, therefore (4)

Answer 2

The nature of costs in a natural monopoly industry = very high fixed costs and low marginal costs
For example, the supply of water or electricity to houses and businesses involves building a big network infrastructure
As a result, fixed costs are enormous but the marginal cost of adding an extra user is very low.
Therefore, the average total cost will continue to fall as extra users are added to the network. This is an internal economy of scale

Question 3

What do they operate in (3+)

Answer 3

Operate in the national interest
Without = missing market
The quality of service provided makes a big difference to the everyday lives of millions of households and businesses

Question 4

Government intervention to protect natural monopolies

Answer 4

Protect suppliers and employees through a process of nationalisation

Question 5

Efficiency

Answer 5

Neither allocative nor productively efficient as there is no minimum on the AC curve and at allocative efficiency there would be a loss

Question 6

Needed for a natural monopoly (3)

Answer 6

One seller of a good in the market
Prices tend to be higher and output is lower than in a competitive market
Firms are able to price discriminate