Natural monopoly Flashcards
What is a natural monopoly?
A natural monopoly occurs when the most efficient number of firms in the industry is one. A natural monopoly will typically have high fixed costs and low marginal costs meaning that is might inefficient to have many firms each proving the same product. Long run average cost continues to fall over a big range of output.
What are issues regarding monopoly and economic efficiency?
Service - does the lack of competition affect the quality of service to consumers.
Prices - how high are prices compared to competitive/contestable market.
Efficiency - productive, allocative, and dynamic
Welfare - net welfare gain/loss
Intervention with monopoly.
A one-off windfall tax on supernormal from monopoly power. But risk of tax avoidance/loss of capital to invest in R & D.
Liberalisation of markets may break up monopolies as it allows smaller businesses to enter and increased contestability. But smaller businesses may struggle to scale up and compete.
Introduce price capping monopolies - Encourage cost efficiency + increases consumer surplus. But monopolists may find revenues in other ways.
Nationalisation. Take some monopoly utilises back into public ownership. Possible loss of productive efficiency.
