Glossary – Natural Monopoly

Definition

A market situation where a single firm (or individual) is the sole producer and seller of a good or service for an entire market, because it faces lower costs of production than two or more producers would.

Example

In many countries, the railway system is operated by a natural monopolist. Due to the high costs for infrastructure and maintenance (tracks, power lines, etc.), it would be more costly for two or more firms to provide railway services.

Relevance

Due to the lack of competition, monopolies often result in higher prices, lower outputs and sometimes inferior quality, as compared to competitive markets. However, natural monopolies are sometimes in the best interest for society, as they are more efficient than a competitive situation. Therefore, natural monopolies may require different types of interventions than other monopolies.

Leave a Reply

Your email address will not be published. Required fields are marked *