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Natural Monopoly

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PPGPortal > Home > Concept Dictionary > N, O > Natural Monopoly
 

Natural Monopoly 

If there are very large fixed costs associated with entering a market and very small marginal costs, monopoly situations often come to exist. Such a situation is referred to as a natural monopoly.

(Dwayne Benjamin, Toronto, PPG 1002H)  

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Natural monopolies are those monopolies that are caused by the existence of high entry costs to a particular market.

The crucial factor that determines whether a natural monopoly will come to exist is the minimum efficient scale (MES) in a particular industry. The MES is the level of output at which a firm reaches the lowest point on the average cost curve. If the MES is small, competitive markets can exist as it is easy for new firms to enter the market.

If the average cost curve is such that the MES is very large, it poses a barrier to entry and monopolistic markets tend to emerge. Natural monopolies are those monopolies that are caused by the existence of high entry costs to a particular market.

     

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