Keeping Low Costs with Natural Monopolies

An industry is a natural monopoly if a big producer can obtain the product at a lower cost then a lot of smaller producers. A good example of this is electric energy. Due to engineering restrictions, a plant of ten megawatts of potency can produce energy for much less than a plant of one megawatt of potency.

In order to see how this leads to a natural monopoly, imagine a situation in which a town that needs ten megawatts of potency is attended at first by ten small plants and each one of these has one megawatt of potency. All of a sudden a big corporation comes along and it builds a plan with ten megawatts of potency. Given that it can produce at a lower cost then the small plants can and more efficiently, the bigger plant offers prices that are lower and steals all of the clients – and this way the small plants soon go bankrupt.

An industry like this is what is known as a natural monopoly because it naturally turns into an industry that is dominated by one producer with low costs. The problem for the authorities is what to do with a natural monopoly.

On one hand, everyone receives with a lot of satisfaction the fact that the bigger plant is more efficient: since it uses less fuel and causes less damage to the environment. But given that it has eliminated all the competition, the people have to worry now that the monopoly does not impose higher prices or produce under the necessary and optimum amount for society.

These bad and good points that are set off take the government to generally allow the natural monopoly to continue operating as an only company in its industry, but at the same time they regularize it so that the people do not have to worry that high prices are going to be established or that there are not going to be any low levels of production. By acting this way, society receives the benefits that this type of production cause which is more efficient without having to worry about the problems that would occur if the monopoly were not looked over.

Beginner Money Investing Examples of Good Monopolies Reducing the Amount of Competitors That Cause Inconvenient Redundancies Keeping Low Costs with Natural Monopolies Regularizing Monopolies Oligopoly and Monopolistic Competition