Economics of a Natural Monopoly
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 1 Dec 2021
This revision video applies and analyses the economics of a natural monopoly
A natural monopoly is a special case where one large business can supply the entire market at a lower long run average cost contrasted with multiple providers.
This is because of the nature of costs in a natural monopoly. Typically, there are very high fixed costs and low marginal costs.
With a natural monopoly, the internal economies of scale available to the largest firms mean that there is a tendency for one business to dominate the market in the long run.
If a state-owned natural monopoly is required to price at marginal cost to achieve allocative efficiency, then this can lead to large losses since price will be below AC.
Many natural monopolies operate in the national interest. The quality of service provided makes a big difference to the everyday lives of millions of households and businesses.
Are digital platforms such as Facebook natural monopolies? Like natural monopolies, the economic characteristics of digital platforms include large and increasing returns to scale.