Furthermore, the market is also characterized by high barriers to entry into the market caused by high capital requirements (“Monopoly,” n.d.). Usually, firms limit the quantity they produce in order to push their prices upwards. In a nutshell, a natural monopoly operates as the sole producer of a given product (Arkani, 2010). As such, the market structure of a natural monopoly necessitates that various measures must be initiated to control firms from exploiting their customers. MONOPOLIES 3 Analysis Reasons for Regulation High Monopoly Market Power One of the major reasons as to why the government may seek to regulate natural monopolies is due to their market structure. Thus, the structure of natural monopolies provides room for consumer exploitation and governments may want to regulate monopolies to ensure that they produce high quality, fair priced goods at efficient levels. There is also no form of competition in natural monopolies whereas there is high competition in perfect competition markets. #NATURAL MONOPOLY FREE#In a perfect competition, there is free entry and exit of firms while there are high barriers to entry in natural monopoly markets. It is noteworthy that a natural monopoly market differs from a perfect competition in terms of competition, entry and exit requirements, and number of sellers. Thus, the efficient number of firms in the industry is one. It is characterized by high costs of infrastructure in terms of grids and cables for electricity supply. A perfect example of a natural monopoly is the electricity company. Mainly, natural monopolies exists where there are high fixed costs of production and distribution, thereby necessitating economies of scale. On the other hand, a natural monopoly is a specific type of monopoly that arises when a single find firm dominates the market due to extremely high startup capital and fixed costs associated with operating in the market. Primarily, a monopoly refers to a market in which when only one firm operates and dominates an entire industry (Beggs, 2016). Public regulation is used in naturally monopolistic markets where public ownership is not a feasible option.MONOPOLIES 2 Why and How Governments May Want to Regulate Monopolies Introduction In every economy, natural monopolies play a significant role. Public regulation may involve government control of the price at which a specific utility must be sold by the monopolistic firm. By directly operating the monopoly, government bars unfair exploitation of monopoly power by the firm. For example a railroad company, owned and managed by government, which is the sole owner of railways infrastructure in the country is a publically owned natural monopoly. Public ownership typically involves direct governemt control of the natural monopoly producing a specific public good or service. In such a situation the government may adopt one of the following two alternative approaches in order to retain the possibility of unit cost advantage of a natural monopoly as well as avoid the negatives of a monopoly: Monopolies tend to restrict supply thus inflating prices. However monopolies have the negative feature that they tend to unfairly exploit their monopolistic power if allowed to. By this logic, it is preferable for a government to allow monopolization of the market. In other words, a natural monopoly uses the economy's limited resources more productively than multiple competing firms. In naturally monopolistic markets, competition is uneconomical because multiple producers are unable to completely utilize economies of scale and this results in unit costs above the lowest possible values and thus higher prices. Pure cases of natural monopoly are rare in real world but they do exit in markets of public utilities such as power, water, telephone, railways etc. Natural monopolies typically exist when production of a product or service requires large and extremely costly infrastructure. Natural monopoly is a monopoly that exists as a result of a market situation in which a single monopolistic firm can supply a particular product or service to the entire market at a lower unit cost than what could be achieved by a number of competing firms.
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