Natural Monopoly

Natural Monopoly

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Natural Monopoly

What is a Natural Monopoly

A Natural Monopoly occurs where the industry can only support one firm.

Characteristics of Natural Monopolies

  • High start-up costs
  • High fixed costs
  • High barriers to entry
  • Unique product or service
  • The industry can only support one firm

Natural Monopoly Diagram

 

 

Analysis of Natural Monopoly Diagram

(Coming Soon)

Examples of Natural Monopoly

An example of a Natural Monopoly would be The London Underground. The cost of digging and maintaining the tunnels in this industry is extremely high. Therefore the industry can only have one firm providing this service. If another firm tried to compete with the London Underground, therefore causing both firms to share customers and profits. There would not be enough profit for both firms to survive and cover their costs in this industry. 

Other examples of Natural Monopoly

  • Water Companies
  • Gas Network
  • Train Lines
  • Electricity Network
  • Telecommunication Network

As Natural Monopolies are the only firms in the industry, they have a lack of competition. The government, therefore, needs to intervene to ensure these markets are regulated to protect the consumers best interests. 

Regulation of Natural Monopolies 

OFWAT – Regulates the water industry 

OFGEM – Regulates gas and electricity industry

OFCOM –  Regulates the communications industry

ORR – The Office of Rail and Road

 

Quick Fire Quiz – Knowledge Check

1. Explain what a Natural Monopoly is (2 marks)

2. Identify five characteristics of a Natural Monopoly (6 marks)

3. Draw and explain the Natural Monopoly diagram (8 marks)

4. Explain how the London Underground is a Natural Monopoly (6 marks)

5. Identify three other examples of a Natural Monopoly (3 marks)

6. Identify four types of regulation for Natural Monopolies (4 marks)

 

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