Natural Monopoly in Economics: Definition & Examples

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  • 0:02 Definition of Natural Monopoly
  • 1:37 Examples of Natural Monopolies
  • 3:09 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Find out what a natural monopoly is and why they exist. Learn about some everyday services that you use that are provided by companies that are natural monopolies.

Definition of Natural Monopoly

Have you heard that business monopolies are bad for consumers? When a monopoly exists and only one business offers a product or service, it could charge whatever it wants, and consumers could suffer. This is certainly a valid concern, and it explains why the government has anti-trust laws, to help ensure that there is adequate competition for various goods and services in the economy. There are instances, however, where a monopoly may exist that benefits all of us. Let's explore what type of monopoly that is and why it is beneficial.

A natural monopoly is a specific type of monopoly that can arise when there are very high fixed costs or other barriers to entry in getting started in a certain business or delivering a product or service. This creates a situation where it is more efficient for one business to deliver a product than multiple businesses. In these situations, there are often government regulations to prevent high prices and corruption. This efficiency results in lower average costs for us.

Can you think of an industry that would be difficult to enter because it would require huge start-up costs? One example may be the gas utility company that you pay to heat your home and water. Can you imagine all the land, facilities, machinery, and technology you would have to purchase, as well as all the pipelines you would have to lay, to start in this business? These extremely high capital costs are often referred to as barriers to entry. Barriers to entry, such as high start-up costs, specialized technology, or difficult licensing and regulation requirements in an industry limit the number of possible entrants into the industry. It is simply too expensive and risky to get started.

Let's take a look at some natural monopolies that you are very familiar with.

Examples of Natural Monopolies

Water Services - An example of a natural monopoly is the company that provides the water we drink out of the kitchen faucet. To have two, three, or four companies all lay pipes throughout the city and into every home would be inefficient and a waste of money. All of these additional costs from companies to lay the proper infrastructure, have their own treatment facilities, and hire their own staff would certainly raise the price you pay for water services. This is a classic situation where lower average costs are created when there is only one provider.

Water Treatment Facility
Water Treatment

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