3.4.5 Natural Monopoly (Edexcel A-Level Economics Teaching PowerPoint)

This editable and downloadable PowerPoint covers aspects of the economics of a natural monopoly.

A natural monopoly is a market structure in which the cost of production decreases as the firm grows larger due to economies of scale. This means that a single firm can produce the entire market output at a lower cost than multiple firms could. Examples of natural monopolies include utilities like electricity or water - it just wouldn't make sense to have multiple firms producing these products, as the infrastructure required to serve customers would be way too costly. Instead, a single firm is able to produce and distribute these essential services at a lower cost to consumers.

Some other examples of industries with natural monopoly characteristics include:

• Railroads: Building rail infrastructure is crazy expensive, and it's more efficient to have a single firm managing a network of tracks than to have multiple firms trying to do the same thing.
• Telecommunications: Think phone and internet service providers - the cost of building and maintaining networks makes it more cost-effective for a single firm to handle it.
• Airports: Building and operating airports requires a ton of infrastructure, and it's typically more efficient for a single operator to manage it all.

Governments may impose regulations on natural monopolies to prevent them from abusing their market power and to ensure that consumers get a fair deal. For example, a government might regulate a natural monopoly by setting maximum prices or requiring that a certain percentage of profits be reinvested in the infrastructure. It's sort of like a referee making sure that the natural monopoly doesn't totally dominate the market and take advantage of consumers.

Are there any examples in history when network businesses have been broken up to create more competition?

One of the most famous examples is the breakup of AT&T in 1984. At the time, AT&T had a monopoly on telephone services in the U.S., and the government decided that this wasn't in the best interest of consumers. The breakup led to the creation of seven regional "Baby Bells" companies, which increased competition and drove down prices for consumers. Another example is the breakup of Standard Oil in 1911. This giant monopoly controlled the oil industry, and its breakup led to the creation of multiple oil companies, including ExxonMobil and Chevron.