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Natural Monopoly - Assignment

   

Added on  2020-02-18

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ECONOMICS(Natural Monopoly)STUDENT ID:[Pick the date]
Natural Monopoly - Assignment_1
NAME:STUDENT ID:IntroductionA peculiar circumstance when instead of multiple firms, a particular firm tends to fulfil themarket needs in a superior manner is referred to as natural monopoly. This situation typicallyarises on account of the sizable advantage in terms of cost which the current player present inthe market enjoys that renders the entry of other players in the market difficult (Samuelson &Marks, 2003). Natural monopoly may arise due to a host of reasons. The key contributingfactor is the reaping of economies of scale which tends to lower the average production costand provides an entry barrier thus justifying the presence of a single firm only. Theoretically,this player on account of 100% market share should have the lowest production cost whichtends to be beneficial in comparison to existence of multiple players. Yet another reasongiving rise to the incidence of natural monopoly tends to be the control on certain resourcesthat may be scarce (Nicholson & Snyder, 2011). Due to the limited availability of theresource, the firm that tends to have control over these ensures that the others firm are notable to enter the market as the enabling infrastructure are single handed controlled. At times,natural monopoly exists because of government policies. This is witnessed often in thosesectors which have a high setup costs related to enabling infrastructure which is witnessed inavenues such as transmission of electricity and other utilities. Clearly, it lacks economicreason to bring about infrastructure duplication on such a huge scale and hence governmentbarriers are erected (Mankiw, 2014).Equilibrium DeterminationIn the absence of any competition and enjoying complete market share, it is normal to expectthat in a natural monopoly setting, the concerned firm would be driven by the aim of profitmaximisation. This would be apparent in their economic decisions i.e. quantity produced andthe price charged. For price maximization, the production of the firm would be carried to theextent that marginal cost (MC) is lesser than price (P). In order to fulfil this, the monopolisticfirm causes artificial shortage or scarcity by producing a output level that is lower than thehighest possible efficient (Krugman & Wells, 2008). This is apparent from the followinggraphs (Mankiw, 2014).1
Natural Monopoly - Assignment_2
NAME:STUDENT ID:The above graph clearly highlights the equilibrium quantity and price charged as Qm and Pmrespectively. A noticeable attribute of the firm operating in the natural monopoly setting isthe fact at equilibrium, the average cost does not attain the lowest value. Therefore from aeconomic efficiency point of view, it would make sense for the firm to increase the output toa point when the average cost curve tends to attain the lowest value. However, at thisproduction level the price charged from the buyers would be lower and therefore the overallprofitability of the firm would decline (Mankiw & Taylor, 2011). As a result, the output in anatural monopoly is lower than the output level at which efficiency would be achieved. Thistends to have an adverse impact on the public welfare. Also, in industries where economies ofscale is high, the monopolist firm can enhance production in order to ward off anycompetition as increasing the output would tend to lower the unit cost and enhance thecompetitive advantage of the existing player (Besanko & Braeutigam, 2010).Efficiency ConsiderationsThe economic resources have scarce availability and hence it is critical that efficientallocation of these must be done in order to ensure that societal objectives are met. In theabsence of any intervention of the government, natural monopoly could be highly inefficientas apparent from the graph shown as follows (Mankiw & Taylor, 2011).2
Natural Monopoly - Assignment_3

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