REGULATION AND

NATURAL
MONOPOLY
B U S I N E S S I N D U S T R I A L E C O N O MI C S ( MA N E 6 1 2 )
MA RY G R AC E P. E D E J E R
 NATURAL MONOPOLY
 An industry is a natural monopoly when one firm can
supply a good or service to an entire market at a
lower cost than two or more firms could.

 It is an industry in which economies of scale are so

important so that only one firm can survive
TYPES OF MONOPOLY
1. UNREGULATED NATURAL MONOPOLY

An unregulated natural monopoly would attempt to

maximize profits by producing the quality of output
where marginal revenue equals marginal cost (MC =
MR)
Consequences of Unregulated Natural
Monopoly?
1. Exploitation to customers
2. Excessive profitability strengthen the
monopoly power
3. Inequitable distribution of resources
4. Operational inefficiency
THE SOLUTION!!!

REGULATING NATURAL MONOPOLY

•If a natural monopoly is regulated to produce the optima
quantity of output, the firm will suffer an economic loss.

•To keep the monopoly firm to survive would require a

government subsidy to the firm to eliminate the economic loss.
1. GOVERNMENT SUBSIDY TO
FIRM
2. ZERO ECONOMIC PROFIT /
COMPROMISE OUTPUT
To avoid the need for a subsidy, natural monopolies are often
regulated to earn zero economic profit (a normal rate of return).

But this leads to the following problems:

1. The natural monopoly lacks incentives to control costs
(price may go up as cost)

2. The regulators may not be able to obtain accurate

information.
The government may wish to regulate monopolies to protect
the interests of consumers. The government can regulate
monopolies through:

•Price capping – limiting price increases

•Regulation of mergers
•Breaking up monopolies
•Investigations into cartels and unfair practices
•Nationalisation – government ownership