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Economics of Natural Monopoly I A Level and IB Economics

Level:
A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC, CIE

Last updated 25 Jan 2024

In this topic revision video we look at the economics of natural monopoly.

Economics of Natural Monopoly I A Level and IB Economics

A natural monopoly is a market structure where a single seller can provide a good or service to an entire market at a lower cost than any potential competitor. This occurs due to high start-up costs, economies of scale, or other factors that give the dominant company a significant advantage over potential rivals.Characteristics of a natural monopoly include:

  • High fixed costs: The industry requires substantial investment in infrastructure or equipment, making it difficult for new entrants to compete.
  • Economies of scale: The dominant company can produce goods or services more efficiently than smaller rivals, due to cost advantages from large-scale production.
  • Network effects: The value of the product or service increases as more people use it, creating a virtuous cycle that reinforces the dominant company's position.
  • Unique resources: The dominant company may control essential resources, such as raw materials or intellectual property, that are difficult or impossible for competitors to obtain.

Natural monopolies can arise in industries such as utilities (e.g., electricity, water), transportation (e.g., railroads, airports), or telecommunications (e.g., broadband, mobile networks). In some cases, governments may regulate natural monopolies to prevent abuses of market power or ensure affordable access for consumers.

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