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Natural monopoly

Natural monopoly Definition

In economics, a natural monopoly is a situation where a single company tends to become the only supplier of a product or service over time because the nature of that product or service makes a single supplier more efficient than multiple, competing ones. It is inefficient to have several electrical distribution systems covering the same area, or several pipelines going in the same direction. It is more efficient to build and operate a single (larger diameter) pipeline.

 


Additional meaning of Natural monopoly:

It occurs in a market where the average cost curve is decreasing when it intersects with the demand curve. In standard supply and demand theory with a perfect competition this creates an equilibrium price that is below the average cost to produce.









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