What’s a market monopoly, also known as a natural monopoly?
The correct answer and explanation is:
Correct Answer:
A market monopoly, also known as a natural monopoly, is a market structure in which a single firm can supply the entire market at a lower cost than multiple competing firms due to economies of scale.
300-Word Explanation:
A natural monopoly occurs when a single company can produce a good or service more efficiently (i.e., at a lower cost per unit) than any potential competitor because of the nature of the industry. This typically happens in industries where there are very high fixed costs and low marginal costs, meaning it costs a lot to start the business but very little to produce each additional unit of the product.
A classic example is a public utility company (like water, electricity, or gas providers). Building infrastructure such as pipelines, power grids, or sewer systems requires massive investments. If multiple companies tried to compete, they would each have to build their own infrastructure, which would be inefficient and more expensive overall. In such a case, having a single provider helps to minimize waste and keeps prices lower for consumers due to economies of scale.
Because natural monopolies don’t face competition, they can sometimes lead to problems such as price gouging or poor service quality. To prevent this, governments often regulate natural monopolies or, in some cases, own and operate them directly.
Key characteristics of a natural monopoly include:
- High fixed or startup costs.
- Decreasing average cost over a large output range.
- Market demand is best met by one firm rather than several.
In summary, a natural monopoly is not the result of unfair competition or illegal behavior. Instead, it is the most efficient market outcome for certain industries where duplication of infrastructure or services would be costly and unnecessary. Because of the risks of unchecked power, natural monopolies are often subject to government oversight or public ownership.