Natural Monopoly: A Cost-Efficient Solution for Consumers
What is a natural monopoly and what are some examples?
A natural monopoly is a type of monopoly that exists in a particular market if a single firm can serve that market at lower cost than any combination of two or more firms. An example of a natural monopoly is the utility industry.
Answer:
A natural monopoly is a market condition in which a single firm can provide a good or service at a lower cost than could multiple competitors. This often results from high fixed costs, as with utility companies or ALCOA's control of the bauxite supply.
A natural monopoly is a condition where a single firm can provide a good or service more efficiently and at a lower cost than could multiple competing firms. This usually occurs where fixed costs are high relative to variable costs. For instance, public utility companies like electricity and water suppliers are typical examples of natural monopolies because of the high initial infrastructure costs.
In the U.S., most of the true monopolies that exist are regulated, natural monopolies. One historical example of a natural monopoly occurred during the 1930s where ALCOA - the Aluminum Company of America - controlled the majority of the supply of bauxite, a key mineral needed for aluminum production, preventing other firms from being able to compete. Another example may be found in local markets for goods that are expensive to transport, such as cement.