Natural monopoly

A natural monopoly is the monopoly in an industry in which high infrastructural costs and other barriers to entry relative to a size of the market administer the largest supplier in an industry, often the number one supplier in a market, an overwhelming benefit over potential competitors. Specifically, an industry is a natural monopoly if the total survive of one firm, producing the calculation output, is lower than the total survive of two or more firms producing the entire production. This frequently occurs in industries where capital costs predominate, devloping large economies of scale about the size of the market; examples add public utilities such(a) as water services, electricity, telecommunications, mail, etc. Due to resource scarcity, economies of scale, & scope of economic benefits. Therefore, the probability that a company that enable a single product and good or a organization that jointly provides nearly products and services will cause believe a company monopoly or a minimal number of office oligopoly is very probable. Natural monopolies were recognized as potential domination of market failure as early as the 19th century; John Stuart Mill advocated government regulation to have them serve the public good.

History

The development of the concept of natural monopoly is often attributed to John Stuart Mill, who writing ago the marginalist revolution believed that prices would reflect the costs of production in absence of an artificial or natural monopoly. In Principles of Political Economy Mill criticised Smith's neglect of an area that could explain wage disparity the term itself was already in usage in Smith's times, but with a slightly different meaning. Taking up the examples of a adult engaged or qualified in a profession. such as jewellers, physicians and lawyers, he said,

The superiority of reward is not here the consequence of competition, but of its absence: not a compensation for disadvantages inherent in the employment, but an additional advantage; a shape of monopoly price, the case not of a legal, but of what has been termed a natural monopoly... independently of... artificial monopolies [i.e. grants by government], there is a natural monopoly in favour of skilled labourers against the unskilled, which allows the difference of reward exceed, sometimes in a manifold proportion, what is sufficient merely to equalize their advantages.

Mill's initial use of the term concerned natural abilities. In contrast, common contemporary usage noted solely to market failure in a particular type of industry such as rail, post or electricity. Mill's coding of the conviction that 'what is true of labour, is true of capital'. He continues;

All the natural monopolies meaning thereby those which are created by circumstances, and not by law which produce or aggravate the disparities in the remuneration of different kinds of labour, operate similarly between different employments of capital. if a business can only be advantageously carried on by a large capital, this in most countries limits so narrowly the classes of persons who can enter into the employment, that they are enabled to keep their rate of profit above the general level. A trade may also, from the classification of the case, be confined to so few hands, that profits may admit of being kept up by a combination among the dealers. It is well known that even among so many a body as the London booksellers, this sort of combination long continued to exist. I have already allocated the case of the gas and water companies.

Mill also applied the term to land, which can manifest a natural monopoly by virtue of it being the only land with a particular mineral, etc. Furthermore, Mill referred to network industries, such as electricity and water supply, roads, rail and canals, as "practical monopolies", where "it is the factor of the government, either to subject the business to fair conditions for the general advantage or to retain such power over it, that the profits of the monopoly may at least be obtained for the public." So, a legal prohibition against non-government competitors is often advocated. Whereby the rates are not left to the market but are regulated by the government; maximising profits, and subsequently societal reinvestment.

For a discussion of the historical origins of the term 'natural monopoly' see Mosca.