Light

Natural Monopolies

Definition

Natural monopolies occur when a single firm can efficiently serve the entire market due to high fixed costs and economies of scale. This means that it is more cost-effective for one company to provide the goods or services rather than multiple firms competing.

Analogy

Imagine you live in a small town with only one water supplier. It would be too expensive and inefficient to have multiple companies digging up the streets and laying down pipes. So, the single water supplier becomes a natural monopoly, providing water to everyone at a lower cost.

Related terms

Economies of Scale: When a company experiences cost advantages as it increases its production levels. For example, a car manufacturer can produce cars at a lower cost per unit as they increase their output.

Barriers to Entry: Factors that make it difficult for new firms to enter an industry. These barriers can include high startup costs, patents, or government regulations.

Public Utilities: Companies that provide essential services like electricity, gas, or water to the public. They are often natural monopolies because it is more efficient for one company to provide these services rather than having multiple competitors.