The Concept of Natural Monopoly

What is a monopoly that arises due to economies of scale called?

A monopoly that arises because of economies of scale is referred to as a natural monopoly.

Understanding Natural Monopoly

A natural monopoly occurs when a single firm can produce goods or services at a lower cost than multiple competing firms due to economies of scale. Economies of scale refer to the cost advantages that arise when production increases and average costs decrease. In other words, as the output increases, the cost per unit decreases.

This type of monopoly often happens in industries where there are high fixed costs, such as infrastructure or utilities. For example, think about a water or electricity company that needs to build and maintain an extensive network of pipes or power lines. The high initial investment required to build this infrastructure makes it difficult for other firms to enter the market and compete effectively.

Since a natural monopoly can lead to limited competition, it is often subject to regulation to ensure fair pricing and quality of service for consumers. This regulation helps prevent the abuse of monopoly power and ensures that the benefits of economies of scale are shared with the public.

In summary, a monopoly that arises due to economies of scale is called a natural monopoly. It occurs when a single firm can produce goods or services at a lower cost than multiple firms. This type of monopoly is often regulated to protect consumers and maintain fair market conditions.