Natural Monopoly Flashcards
What are the characteristics of a natural monopoly?
Huge fixed costs- especially start up costs
Huge EoS potentials
Rational for 1 firm to supply the entire markets. Comp undesireable.
Why is competition undesireable?
Because there will be a wasteful duplication of resources and no exploitation of EoS.
The first firm entering has the EoS advantage. Others entering wont have the same. They will eventually be priced out. As they leave all resources and infrastructure will be left idle. Allocative inefficiency.
Also if theres a lot of small firms in comp, EoS cant be exploited properly. Productive inefficiency.
What is a natural monopoly?
This is when theres one firm dominating the market, which will lead to allocative and productive efficiency as long as its regulated.
Explain the market?
Due to the nature of the market, regulators may step in and force the firm to lower prices to AR=MC. Firms will be making subnormal profits at this point.
The regulators/gov will subsidise this loss.
