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This situation, when economies of scale are large relative to the quantity demanded in the market, is called a natural monopoly. Natural monopolies often arise in industries where the marginal cost of adding an additional customer is very low, once the fixed costs of the overall system are in place. Once the main water pipes are laid through a neighborhood, the marginal cost of providing water service to another home is fairly low. Once electricity lines are installed through a neighborhood, the marginal cost of providing additional electrical service to one more home is very low. It would be costly and duplicative for a second water company to enter the market and invest in a whole second set of main water pipes, or for a second electricity company to enter the market and invest in a whole new set of electrical wires. These industries offer an example where, because of economies of scale, one producer can serve the entire market more efficiently than a number of smaller producers that would need to make duplicate physical capital investments.

A natural monopoly can also arise in smaller local markets for products that are difficult to transport. For example, cement production exhibits economies of scale, and the quantity of cement demanded in a local area may not be much larger than what a single plant can produce. Moreover, the costs of transporting cement over land are high, and so a cement plant in an area without access to water transportation may be a natural monopoly.

Control of a physical resource

Another type of natural monopoly occurs when a company has control of a scarce physical resource. In the U.S. economy, one historical example of this pattern occurred when ALCOA—the Aluminum Company of America—controlled most of the supply of bauxite, a key mineral used in making aluminum. Back in the 1930s, when ALCOA controlled most of the bauxite, other firms were simply unable to produce enough aluminum to compete.

As another example, the majority of global diamond production is controlled by DeBeers, a multi-national company that has mining and production operations in South Africa, Botswana, Namibia, and Canada. It also has exploration activities on four continents, while directing a worldwide distribution network of rough cut diamonds. Though in recent years they have experienced growing competition, their impact on the rough diamond market is still considerable.

For some products, the government erects barriers to entry by prohibiting or limiting competition. Under U.S. law, no organization but the U.S. Postal Service is legally allowed to deliver first-class mail. Many states or cities have laws or regulations that allow households a choice of only one electric company, one water company, and one company to pick up the garbage. Most legal monopolies are considered utilities—products necessary for everyday life—that are socially beneficial to have. As a consequence, the government allows producers to become regulated monopolies, to insure that an appropriate amount of these products is provided to consumers. Additionally, legal monopolies are often subject to economies of scale, so it makes sense to allow only one provider.

Questions & Answers

Leo Robinson's definition
Adejimi Reply
how is equilibrium defined in financial markets?
Babakura Reply
the concept of it
DALOM
Country A has export sales 20 billion, government purchases 1000billion, business investment is 50 billion, imports are 40billion, and consumption spending is 2000billin. What is the dollar value of GDP ?
Habtamu Reply
what is determination of national income?
Waqar Reply
economic growth
Rukaiya
stock of capital
Rukaiya
we're RBI keep money with them
Anil
Y =C+l
Favour
evaluate the success affirmative action as one of south Africa's redress method
Tebatso Reply
what is market equilibrium
explorer Reply
it is a situation in which the supply of an item is exactly equal to it dd .
Ssmith
inder wat condition shld a firm stop production in both short n lungrun ?
Ssmith
what is 2nd degree price discrimination?
Ssmith
what is quantity
Tettey
what is quantity2
Deji Reply
An indefinite amount of something.
explorer
what is demand
Kaman Reply
in ordinary sense demand means desire
Khalid
demand in economics means both willingness as well as the ability to purchase a commodity by paying a price an also its actuall purchase
Khalid
what is absolute advantage
Khalid
demand refers to the various quantity of goods and services that consumers are willing and able to purchase at a particular period of time all other things been equal
Dela
The amount of a good or service that consumers are willing to buy at a particular price.
explorer
what is cost pull inflation?
oru
what is utility
oru
what is cost pull inflation?
oru
demand is economic principle referring to a consumer's desire and willingness to pay a price for a specific or service..
Babakura
utility is the among of certisfaction driving from using a comundity
Anas
pull cost of inflation hight population unemployment to some of The country members poor government system
Anas
what is a buffer scheme
Lukong
state the second law of demand and supply
Ahmadou Reply
state the law of diminishing marginal utility
Ahmadou
dt know WATS the answer
Rukundo
mention and explain two Bank I financial institutions and two non baking financial institutions
Onah Reply
wat is demand pull inflation
Tony Reply
Demand-pull inflation is asserted to arise when aggregate demandin an economy outpaces aggregate supply. It involvesinflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve.
kevin
Perfectly elastic demand
Abubakar Reply
this is a form of demand where goods are demanded at a constant price
Rukundo
what inelastic demanding
Koire
demand of any good demanded more after a certain period. if a commodity prices may high and scarcity of that resources.
Anil
cannot demand more
Anil
what is cross-elasticity of demand
Miles Reply
cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in other good
Mallekha
this is responsiveness quantity demanded keeping other factors constant
Rukundo
what economic growth
Rukundo Reply
conditions of perfect market
NdzAlama Reply
CONDITIONS OF PERFECT MARKET: 1. Perfect competition(PC): no increasing returns, many buyers and sellers, all are price takers, not prices makers. 2. Perfect Information (PI): buyers and sellers know all they need to know about what they are buying and selling to make the right decisions.
Mallekha
3. Complete Markets(CM): no externalities or public goods, no transactions costs, "thick" markets.
Mallekha
nice contributor
Mohammed
A numerous downsized market that does not meet standards.
LaTasha
A Perfect Market is a numerous downsized market that does not meet standards.
LaTasha
what is a market
Ahmadou
is place where buyers and sellers met together for the purpose of buying and selling of good and services
Babakura

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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