What are Natural Monopolies?

Business & Management
#1

A natural monopoly is a monopoly that develops in an industry with exceptionally high fixed distribution costs. Electricity delivery, for example, necessitates a massive infrastructure of cables and systems. The costs of the infrastructure are deemed sunk costs by the firm that pays for it, or expenditures that cannot be recovered once committed. Because other entrants would have to duplicate the expensive infrastructure, if more entrants were encouraged to enter the market, inefficiencies and losses to society would result.
Theoretically and practically, the natural monopoly theory is questioned. The theoretical difficulties indicate that general equilibrium microeconomics has methodological faults, and that perfect competition models have defects.
Other economists argue that history contradicts natural monopoly theory, claiming that deregulated industries managed by huge corporations have increased productivity, lower real costs, and a plethora of new entrants.

#2

A natural monopoly is where a single firm is more efficient and cost effective than competing firms could be. An example is the tap water system in a city. Another might be the electrical supply. A natural monopoly can cease being a monopoly if it becomes inefficient and loses its cost effectiveness, attracting competing firms into the market.