Definition of a Natural Monopoly

A natural monopoly is a common term that is used in public sector economics. A monopoly is defined as a single exclusive seller in a specific market. Economics Online defines a natural monopoly as a distinct type of monopoly that may arise when they are extremely high fixed costs of production. Such a situation exists when large scale infrastructure is required to ensure supply of the good. Common examples of natural monopolies include rail, electricity grids, oil pipelines and water supply. Such infrastructure is mostly provided by the Government companies who are usually the sole supplier of the good or service.

Most of the natural monopolies are found in areas that cater for the essential services in the country. Natural monopolies are also expensive to set up. Most Governments invest a lot of money in a bid to provide their citizens with efficient services despite the huge cost of the infrastructure. These companies are then largely known as public utilities companies because the aim of operating is to provide utility or satisfaction to the public at large.

Most Government nationalise natural monopolies because of the simple fact that they yield a lot of excessive power. There is also a lot of effort from Governments to make the goods and services as cheap as possible to the citizens. For those that are privately owned most Government heavily regulate the operations of the companies to ensure that the public is not exploited. To prevent such exploitation the Government usually allows these companies a fixed percentage of profit above the cost. In most countries telecommunication service are subject to strict pricing rules which are designed by the Government regulators to ensure that the public is not ripped off. This then ensures that citizens derive the maximum utility from the services offered.

Due to the high cost of setting up infrastructure for the natural monopoly it does not make sense for more than one company to operate. So the setting up of one natural monopoly can actually stop the wasteful duplication of resources. This efficiency loss then means that the public utility will drop due to the wastage. A typical example is the setting up of an oil pipeline for a country that is landlocked. Often the cheapest way of transporting oil is by pipeline and Government then invests a lot of capital to construct the pipe. It then benefits society if the different oil companies use the pipe to bring in oil rather than each company setting up its own pipe. This now has a greater advantage because all the oil companies are benefiting from the pipe which decreases cost and at the same time increases competition .Companies also benefit from economies of scale because should the pipe be damaged the cost of repairing it is then shared among the parties.

The biggest disadvantage of a natural monopoly is the fact that due to lack of competition they tend to become inefficient and offer unreliable service to the users. This is mainly true with companies that are run by Government. The modern day trend in most countries is now for natural monopolies to offer services on a commercial basis. This is mostly done by inviting the private sector to be active in service provision. This has worked well according to Wikipedia. the following website. The telecommunication and rail industries are all examples of sectors that have private involvement. This has also lead to the increase of a number of regulatory bodies that are tasked to protect the interest of the users.