Natural Monopoly (Evaluation Skills Video)

Here is a short video building analysis and evaluation arguments on this question: "Evaluate the impact of the existence of a natural monopoly on consumer welfare"

Core Notes:

In a natural monopoly there are gains in productive efficiency from supplying products on a large scale.

Eval: However in a natural monopoly, a single supplier could in theory charge a very high price which might damage consumer welfare.

An industry regulator might decide to cap the prices of a natural monopoly to help achieve allocative efficiency and protect poorer families

Eval: But if MC<LRAC, then capping prices at marginal cost will inflict losses on the industry which might have damaging effects on investment and innovation.

A natural monopoly such as regional water utility has high barriers to entry causing X-inefficiency and higher bills for consumers

Eval: However, some of the supply chain to the final consumer might be deregulated to stimulate competition and thus lower prices

A natural monopoly is a type of monopoly that has very high fixed or start-up costs (e.g. spending on tracks / , or a very large minimum efficient scale associated with the industry and so the long run average cost curve falls continuously over the whole market’s range of output, and as such, the long run marginal cost is not able to cut the LRAC at its lowest point as output is not yet high enough for that to happen. This means that there is only room in the market for one firm to fully exploit the economies of scale that are available.