Natural Monoply, effeciency question?

Question

Why does a natural monopoly create an inefficiency when charging only one price and must cover costs.

AND

how does a monopoly cover operate efficiently and make a normal economic profit

Answer 1

Natural monopolies are usually inefficient because it does not have any competitor, which can threaten the existence of this monopolistic company.

Meaning, a company which has a natural monopoly (for example, electric service in a rural town) in a certain industry will alwayas have consumers or customers because basically the customers do not have any choice. Because of this privilege, the company does not highly value customer feedback or satisfaction.

While in certain industries with many competitors (for example, subdivision sales, computers and other electronic products), customer satisfaction is given priority because once that is not met, the customers/consumers have many others to choose from. Competing for customer satisfaction leads to quality service/product and reasonable prices.

A natural monopoly can only be efficient if it is handled by an effective management. Usually, it becomes effective when there is pressure from the government, media or/and from private sectors (usually, there are resignations and the vacant posts are replaced by people promising change or efficiency). This management to be effective should prioritize customer satisfaction (that will lead to service/product quality, reasonable prices, and at the same time, profit to the company). To do this, the management should carefully assess and balance the operating costs (salaries, purchase of raw materials, etc.) and the revenues (customer payments).

Answer 2

They are usually inefficient as there are too many barriers to entry and only sustainable when there is one provider. Usually Natural monopoly is runned by government or under strict conditions to prevent abuse of market power.

Answer 3

well it is simple . . in case of natural monopoly there is naturally only one firm that may operate in the market. . now there may be two situations

1. natural monopoly position aquired by private profit maximizing individual. . . this will create in efficiency as the monopoly will charge excessive prices and restrict the quantities to support the price rise. hence create dead weight loss

2. natural monopoly position aquired by the government .... normally governments in natural monopoly case try to charge a minimum price to support the society which at times is lower than the equilibrium price hence creates shortages and in effeciency .

monopoly may charge a perfectly differentiated price charging every one a different price (exactly what that person can pay) this increases monopolys effeciency as all the people who are willing and able to pay are getting the good but without any consumer surplus

but when a monopoly charges a single price it will miss out all those consumers that it might have gained by discriminating the price. and hence suffers ineffeciency

and a monopoly may operate efficiently where demand curve is perfectly elastic. .........

.

.

.