Th3.4: Natural Monopoly

Question 1

What is said to happen in these industries?

Answer 1

the economies of scale are so large that even a single producer is not able to fully exploit all of them

Question 2

What kind of industries are these?

Answer 2

decreasing cost industries

Question 3

There are no pure natural monopolies in real life but some examples include…

Answer 3

the National Grid, Royal Mail and National Rail

Question 4

Refer to PP

Look at Graph 40. What does this show?

Answer 4

a natural monopoly - AC and MC continue to fall

Question 5

Refer to PP

Look at Graph 40. What will the firm do?

Answer 5

profit maximise and produce where MC = MR at Q1P1, making supernormal profit of the shaded area

Question 6

Why would it be pointless to encourage competiton?

Answer 6

since it would raise average costs for the industry - if any new firm enters the market they will easily be priced out due to higher costs. raises question for competition policy and nationalisation

Question 7

What kind of industries do natural monopolies tend to be found in?

Answer 7

industries with very high fixed costs, such as railways
(In order to run one train you would need to invest billions in track, tunnels, bridges and stations whilst running extra trains represents a much smaller relative increase in costs, meaning average costs will decrease drastically.)

Question 8

Why are these firms neither allocative nor productively efficient?

Answer 8

not productively efficient as there is no minimum on the AC curve
not allocative efficient as there would be a loss