Natural Monopoly

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DEFINITION of 'Natural Monopoly'

A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Because it is economically sensible to have certain natural monopolies, governments often regulate those in operation, ensuring that consumers get a fair deal.

BREAKING DOWN 'Natural Monopoly'

The utilities industry is a good example of a natural monopoly. The costs of establishing a means to produce power and supply it to each household can be very large. This capital cost is a strong deterrent for possible competitors. Additionally, society can benefit from having natural monopolies because having multiple firms operating in such an industry is economically inefficient.

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RELATED FAQS
  1. What average annual total return does the utilities sector generate?

    Due to their highly stable earnings and cash flows, utilities companies are popular among investors interested in dividend ... Read Full Answer >>
  2. What does it mean when a utility company has a natural monopoly on a market?

    In economics, a natural monopoly is defined as an industry in which production by a monopolistic company is much cheaper ... Read Full Answer >>
  3. What barriers to entry exist in the utilities sector?

    There are significant barriers to entry in the utilities sector, including massive infrastructure requirements and governmental ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  6. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>

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