In economy natural monopoly occurs when there is only one firm or few in the market that provides certain goods and service efficiently such as provision of water supply. It is where most or all sales are undertaken by a specific firm. It is by contrast a condition on given cost analysis technology of any established firm where it is most efficient for productionprocess to be done by a single firm(Berg, 1988).This enables the firm to have an added advantage in terms of supply of goods and services in the market. A good example of natural monopoly is the utilities industry. The cost of establishing a means of providing power to all households is high and this acts as a deterrent to those investors with the potential or will to enter in the industry. Natural monopoly is efficient hence making it advantageous to the society since with multiple service providers, inefficiency is likelihood.
When analyzing the market natural monopoly has unique characteristics whereby there is increase of sales return at any given point in the economy. There are major attributes associated with natural monopoly and they are as follows;
a) Capital Costs
First and foremost, natural monopoly occurs where capital costs are predominating. It is expensive to provide services like water, pipeline, power and many more therefore keeping likely competitors away. This is because they cannot afford the cost therefore leaving one firm to provide those services.
b) Legal Barriers
On the other part natural monopolies are created due to legal barriers. Patent laws grant an investor a right to provide services for a given period of time and are restricted to specific areas. This as well pushes away those that might want to provide these services due to these limitations.
c) Economies of Scale
In some cases, economies of scale exist so that there is tendency to natural monopoly. One firm can provide a service or good more efficiently. An example is a power provider in a rural area .Duplication of these services would not be effective therefore government policy to encourage more entrants may not make sense.
d) Consumer Preference
This can be simply explained by an example of computer users. They prefer adhering to a common standard. They prefer Microsoft only therefore even though other service providers come up; they stick to Microsoft to be their provider. This makes Microsoft a natural monopolistic firm.
Monopoly in other words means few firms taking certain activities in production of goods and services hence it does not real mean only one company providing goods and service. On other hand alsosmall firms provide the same service in smaller segments of a firm. Natural monopolies in many cases require huge initial investment in terms of creating a strong empire for business activity. Being almost the only service provider the firm has to make sure that they only offer what is quality to the customers.
With such deep-rooted monopoly power, a firm might get tempted to take advantage and exploit market power by raising prices for the commodity. This makes the firm make supernormal profits-damaging consumer welfare.
The graph above explains why it is very hard for economy to grow at faster rate with many firms competing in the market. This graph examine how all natural monopoly have a higher fixed cost which does not relate to the volume of product produced but the extra unit produced
When any natural monopoly firm is created, its basic purpose is to benefit from economy of scale from the market in terms of low production cost of producing certain goods and service.
If a natural monopolist exploits prices of their products the consumer calls for regulation from the concern government. The government may establish rules and regulation than will guide many new many businesses that want to venture in a market where there exists a natural monopolist already.
From the above graph, AC and MC are positioned in such a way to establish a clear picture on how firms under natural monopoly have market advantage over all other competitors. AC is always greater than the MC. Examining the stated relationship between average and the marginal values, we discover that AC always be declining because MC is below as shown in the graph. Further analysis on the above graph shows that at any given point AC will always degrease and the same time Q increases. In natural monopoly AC is said to decrease as Q increases.
From the above graphs, we are able to analyze that natural monopoly plays significant role in terms of dictation of local and international market(Posner, 1999). We have examined how various attributes affects the ways firms and other trade organization enter and exit the market. For example when we analyze how capital cost affect how firms enter or exit the market. This is because the capital cost of entering in a given market or industry may be too high hence preventing many firms from entering the market. The government sometimes use this attributes to prevent many investors to engage in such a business because of sensitive services to the government. Many government institution use natural monopoly to control key sectors of the economy such as energy sector and banking sector. This is because the government collects more than half of its revenue from the two mentioned key sector. These enable the government to control the sectors so that to maximize its revenue. Any business organization willing to invest in such business must have to pay huge capital for them to be able to invest in such key economy sectors. On other hand if the government wants to encourage many investors to invest in a given industry, it will reduce the capital cost required to start such business. This is very important because sometimes natural monopoly is efficiency in every sector.
Legal barriers play a vital role in natural monopoly. As explained in the graph above, in natural monopoly there are rules and regulation that must be followed. This is because any firm given right to provide goods and service must be protected from certain laws. These laws include the period in which the firm will be allowed to trade without any interference. This enables the company or the firm to have added advantage in the market because there is no competition from other firms. Such laws enable the firm to provide goods and services at specific time, free from any competition or no other firm is supposed to produce or provide similar services/goods.
Economy of scale can lead to natural monopoly; this is because the government may encourage provision of goods and services in large scale so that to benefits from huge discounts and other benefits (Sherman 1989). The issues of many firms providing similar services may be discouraged to allow one firm or few firms to lender such services so that they customers may benefits huge discount services.
In conclusion natural monopoly is very essential to many government institutions in terms of provision of goods and services. As explained above, each attributes of natural monopoly is very important in terms of ensuring that the firms practicing natural monopoly are protected from any competition to ensure they deliver efficient and effective services to its customers as explained in the above graphs.
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