Natural Monopoly Generally, a Monopoly Is Taken

Natural Monopoly

Generally, a monopoly is taken to be a situation whereby a given entity controls or owns the whole market or a significant portion of the same for a specified good or service. Essentially, there are several types of monopolies. In this text, I concern myself with natural monopolies.

A natural monopoly in the opinion of Baumol and Blinder (2007) "is an industry in which advantages of large-scale production make it possible for a single firm to produce the entire output of the market at a lower average cost than a number of firms, each producing a smaller quantity." Basically, what brings about a natural monopoly are the significant start-up as well as fixed costs associated with running a given type of business in a specific market. A good example of a natural monopoly in this case is a utility company operating in the utilities industry. For instance, when it comes to water distribution, such an undertaking can only take place through the construction of a network of pipes throughout the specified locality. In such a case, multiple firms seeking to offer the same service within the same area would be forced to lay water pipes concurrently -- an undertaking that does not make both economic and financial sense. As King et al. (2011) note, when it comes to water distribution, "the average total cost of water is lowest if a single firm serves the entire market." The sewage industry remains yet another example of a natural monopoly. For instance, a firm seeking to construct a sewerage system in New York City would find it particularly costly to lay a second set of sewer pipes. It therefore follows that in a way, some industries regarded natural monopolies tend to possess a 'natural' reason for being classified as such. This reason could be that economies of scale accrue to only one, as opposed to several companies.

In my opinion, I am convinced that the government should treat as natural monopolies both cable and telephone companies. My assertion in this case is founded on the fact that in the event of an establishment of operations in the same area or locality by such companies, a somewhat inefficient cable multiplication would arise. Entering the industry served by these companies would also require significant start-up as well as fixed costs. Further, according to Mankiw (1998), "when a firm is a natural monopoly, it is less concerned about new entrants eroding its monopoly power." What this effectively means is that cable and telephone companies are more likely than not to remain monopolies going forward. By virtue of possessing monopoly power, natural monopolies can easily exploit consumers by setting high prices for their services. Thus it would only be reasonable for the government to treat these two companies as natural monopolies so as to closely regulate them and hence protect the interests of consumers. It is however important to note that sometimes, it makes economic sense to have natural monopolies. For instance, having multiple water distribution companies within a given locality could trigger economic inefficiencies. However, governments often ensure that natural monopolies are regulated so as to protect consumers from exploitation. In an unregulated business environment, natural monopolies would most likely seek to maximize their profits by raising prices. On the other hand, what would be in the society's best interests is an increase in the level of production and a reduction in the prices of goods and services. In such a case, McEachern (2011) concludes that "the government usually regulates a natural monopoly, forcing it to lower its price and increase output."