Explain the concept of natural monopoly.?

Question

Explain the concept of natural monopoly.?

Answer 1

A natural monopoly is a market structure in which there is so much capital investment required that it is inefficient for more than one firm to do it.  An example is the water company.  It is inefficient for 2 firms to spend all the money to connect pipes to your house, because you'll only end up choosing one of them, and there would be a higher price charged by each firm to make up for the fact that half of their pipes would earn no revenue.  Another characteristic is a low marginal cost.  Once the company has built the pipes, it doesn't cost much to run the water through them.  Thus, the monopoly has to charge above marginal cost to make up for the investment.