![]() Therefore, it is important for governments to regulate natural monopolies in order to ensure that they are operating in the best interest of society. ![]() This can lead to higher prices for consumers and reduced economic welfare. Both firms have to pay high fixed costs to build the necessary infrastructure to produce and distribute electricity (i.e., high barriers to entry). One reason for regu- lating trucking, however, was to protect a discriminatory pattern of railroad pricing that had arisen in the era when the railroad industry had pronounced natural monopoly features. To illustrate this, let’s assume there are two firms in the market, Firm A and Firm B. trucking is a good example-the allegation of natural monopoly is preposterous. That means if a single firm is able to produce enough supply to meet the entire market demand at a lower cost than two or more firms, it can use its market power to charge higher prices and earn higher profits than if the market were competitive. Example A common example of a natural monopoly is the electricity industry. Natural monopolies are important because they can lead to market inefficiencies if left unregulated. Thus, in this case, a single firm is able to produce enough supply to meet the entire market demand at a lower cost than two or more firms. That means if both firms were to produce electricity, they would have to split the market, and the total cost of production would be higher than if only one firm were to produce the electricity. However, once the infrastructure is in place, the marginal cost of producing additional electricity is very low. To illustrate this, let’s assume there are two firms in the market, Firm A and Firm B. ExampleĪ common example of a natural monopoly is the electricity industry. ![]() This is usually the case when there are high fixed costs and low marginal costs associated with producing the good or service. ![]() That means it is the most efficient way to produce a good or service. A natural monopoly is a market structure in which a single firm is able to supply the entire market demand at a lower cost than two or more firms. ![]()
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