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Describe the characteristics of natural monopolies and the purposes of government regulations of these monopolies, such as utilities.


Delco_Electric_Company_(cropped).jpg
Delaware County Electric Company

Characteristics of Natural Monopolies


A natural monopoly is a situation where for technical or social reasons there cannot be more than one efficient provider of a good. Public utilities are usually considered to be natural monopolies. Examples include water services and electricity.
Natural monopolies tend to occur in cases where capital costs predominate. It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines); therefore, it is unlikely that a potential competitor would be willing to make the capital investment needed to even enter the monopolist's market.



Examples of Natural Monopolies

  • Water/Electric Utilities
    • Water and Electric service providers are considered Public Utilities, and often have a natural monopoly on the water and electric service in their given communities because of infrastructural impediments.
    • See Electricity and Its Regulation from the Library of Economics and Liberty.
  • Railroads
    • Railroad companies also tend to hold natural monopolies because of infrastructural conditions, it not being economically viable to lay new railroad tracks where ones already exist.
    • See here for information in the rise of the Railroad monopolies
    • For a conversation about the African American Railroad Experience, and the growth of Black Railroad worker's unions, see here.
  • Telephone Lines
    • For a long time Alexander Graham Bell's company had a natural monopoly on the telecommunications industry, until it was forcibly split up in 1984.
    • For more information on that breaking up of the monopoly, see here.


Regulating Natural Monopolies


  • Because of the problems that arise whenever monopolies exist, governments enact regulations to avoid these problems when such natural monopolies cannot be avoided.
    • To see regulations regarding Utility Service Providers in Massachusetts, see here

See here for a lesson guide on regulating natural monopolies
Multimedia.png
See here for a Youtube video with a basic explanation of natural monopolies

Also see here for a Study.com video with a definition and examples of natural monopolies



Electricity and Its Regulation from the Library of Economics and Liberty.
For an historical perspective, see TVA: Electricity for All focusing on efforts during the New Deal to bring electricity to rural areas in the South.


(1) Natural Monopoly Law and Legal Definition. US LEGAL. Retreived April 25 2012 http://definitions.uslegal.com/n/natural-monopoly%20/
(2) Delco Electric Company Image (Cropped). Wikimedia Commons. Retrieved April 25 2012 http://commons.wikimedia.org/wiki/File:Delco_Electric_Company_(cropped).jpg