Owen Sharpe Economics: Natural Monopoly

A natural monopoly is a single seller in a market which has falling average costs over the whole range of output resulting from economies of scale. Often they are particularly significant industries such as the city water supply and have very high fixed costs and minimal variable costs. A natural monopolist can produce more cheaply than any two or more other firms.

Economies of scale occur when long-run average total cost, (with all factors varying) falls as the quantity of output increases. Economies of scale may arise because of high fixed costs, such as setting up a dam and piping for a city water supply.

The lowest cost per unit that can be achieved for a given level of output when all factors of production, all costs, and the size of the firm are variable, but technology is constant. The lowest per unit cost of producing output when the usage of all input can vary; U-shaped, = TC/Q. Total costs (LR) divided by output. The LRAC curve envelopes a series of putative SRAC curves.

Market equilibrium is the normal firm's equilibrium producing an output where marginal revenue equal to marginal costs.

Where the firm is forced by government to operate at a bigger output where average revenue equals average costs.

This is the output where the supply and demand curves intersect, where price equals marginal costs. It is the allocatively efficient output in terms of resource use. Often AR