One way to make sure that a private natural monopoly cannot abuse its market power is to nationalize it – for the state to provide the good or service.Īfter WWII, there was a nationalization wave across Europe, with state-owned companies taking over the provision of electricity, water, gas, mass-transportation, postal services and telecommunications. ( Image: Adapted from Wikipedia) Nationalizing natural monopolies He was the first to rate bonds and founded the Moody’s Investros Service. John Moody (1868-1958) was an American businessman, financial analyst and investor. If there is just one supplier of water, electricity or cooking/heating gas, consumers must continue buying from the monopolist, regardless of prices. This is especially true in cases where the natural monopolist provides a product or service that consumers cannot refuse – for which there is no substitute. – Promoting system expansion or investment. – Limiting a firm’s ability to abuse its market power. That is why governments have legislation and regulations and closely monitor them.Ī business hoping to enter a market which is currently dominated by a natural monopoly may urge the government to introduce legislation.Ĭommon reasons for having regulations include: Natural monopoly – legislationĪ monopolist that achieved its position through natural monopoly effects is able to and might be tempted to abuse its market position. Most public utilities – companies that provide utilities such as natural gas, water, electricity, etc. During the last 2 decades of the last century, the state-owned companies were sold off, and today the country’s power generation and distribution is dominated five companies. The Electricity Division of the Ministry of Energy became responsible for electricity generation, transmission, policy advice and regulation in 1978. In New Zealand in 1946, electricity generation and transmission became state-controlled, under the SHD (State Hydro-Electric Department) and NZED (New Zealand Electric Department). “Such situations occur usually in case of utilities or where a market can support only one producer (because the decreasing returns to scale make the optimum plant size large in relation to the demand) or where long-range average total cost is declining with higher output throughout the range of the possible demand.” “Situation where one firm (because of a unique raw material, technology, or other factors) can supply a market’s entire demand for a good or service at a price lower than two or more firms can.” Capital costs (startup costs) as well as maintenance costs (fixed costs) are strong deterrents for potential competitors.Īccording to, a natural monopoly by definition is: Natural monopolies do not exist as a result of hostile takeovers, consolidation or collusion. However, they are usually closely monitored to make sure there is no abusive monopolistic-type behavior in which consumers might fail to get a fair deal. Governments allow these natural monopolies to exist because they make economic sense and are in the best interests of its citizens. A common example is water distribution, in which the main cost is laying a network of pipes to deliver water.” Natural monopoly – government oversight The Economist’s glossary of terms says that a natural monopoly occurs: “Because it is more efficient for one firm to serve an entire market than for two or more firms to do so, because of the sort of economies of scale available in that market. They may also arise in industries were unique raw materials and/or technology are required. Natural monopolies exist where fixed costs and/or startup costs are extremely high. If there is just one water company in a town or region, the cost per customer is usually lower than would be the case if there were rival suppliers. Water distribution, for example, requires digging up huge areas or ground and laying down a vast network of pipes to deliver water to people’s homes, businesses, golf clubs, parks, and other entities. Natural monopolies are common where expensive infrastructure has to be installed and maintained. A natural monopoly exists when it makes more economic sense for just one company to supply the whole market compared to having two or more competitors, mainly because of the economies of scale that are available in that market.
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