Advantages and Disadvantages of Natural Monopoly

Advantages and Disadvantages of Natural Monopoly
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Natural Monopoly is the system in which a monopoly exists due to naturally occurring conditions. It makes the organization the sole provider of certain products with no other competitors in the entire market. This can occur due to high initial costs or the inability to acquire certain raw materials or technology in a specific location. These barriers can restrict the entry of new companies to enter into the market. There are both Advantages and Disadvantages of Natural Monopoly from the standpoint of companies and consumers.

These companies are usually regulated to ensure consumer protection against this kind of monopoly. Power Grids is one of the best examples of a natural monopoly as establishing new grids is impossible in the exact location. In this type of monopoly, the company is the only provider of products, services or raw materials. This monopoly doesn’t arise due to any unfair practice, but it occurs due to various restrictions on availability. The limitations and possibilities of this system lead many thinkers to consider different pros and cons of natural monopoly.

What are the Advantages of Natural Monopoly?

The government-controlled entities such as defence, railways, etc., are examples of natural monopoly. Also, in cases where a large company can provide goods at a cheaper price than any small competitor, this situation prevails. Here are few notable advantages of a natural monopoly and why it should remain in the system.

1. Natural Monopoly Prevents Duplication

Since the sole efficient provider of goods and services is one, the possibility of duplicate products decreases. The consumers can then get authentic products in the market, and the choice of products is limited, so the hassle of choosing the right product is not there.

2. Lower Prices

Due to the only supplier, the price of a product is controlled and maintained by a single entity. Usually, the firm is regulated to ensure that the consumers are not exploited due to the firm's monopoly. Usually, natural monopoly is found in government-owned organizations that are intended to favour consumers.

3. Companies can conduct better research

The firm has nothing to fear about their sales or marketing, and the complete focus can be shifted to provide better quality for their customers. In addition, it can lead to better research facilities within the organization, which can regularly work in the research field and get better quality and technology.

4. High Profits are the main advantages of Natural Monopoly

The organization where a natural monopoly exists are large most of the time, and hence the output and profits are also high. Moreover, since the entire population of the area has no other means of getting those services or products, they are permanent consumers, and the firm's profits are always increasing.

5. Large Output

If there are no other means, the consumer can get the same services; the whole responsibility is on the firm to provide the population. This leads to larger output for the entire population as the sales are very high in monopolies. The infrastructure is also developed for high output capacity. This means that companies can eventually generate larger output, one of the sought advantages of natural monopoly.

What are the Disadvantages of Natural Monopoly?

Usually, a monopoly is considered harmful for the market as it leads to the discrimination of consumers and shifts the power of price control and supply to few. But naturally occurring monopoly is usually due to concrete reasons, but still, there are few disadvantages of natural monopoly.

1. Requires Regulation

In order to ensure that the firm does not use unfair practices to increase its profits, it has to be regulated by the government or business regulatory authorities. If it is not done, the firm can restrict the supply and increase prices to any range whatever they want.

2. High Initial Investment

As discussed, the reason behind this monopoly can be the high initial cost involved in starting a firm. Due to this, small businesses are not capable of creating and maintaining such organizations, and only the government or wealthy people can invest such money. The inability to incur higher initial costs is one of the common disadvantages of the natural monopoly for small business owners.

3. Discrimination

Even after the regulations, the firms are free to bargain the price offered to the public, and regular increases in prices are often seen. Consumers have to live with this discrimination if they have to use the services, and mostly the benefits are essential such as electricity or airlines.

4. Limited choices are a major disadvantage of natural Monopoly

Consumers are bound to a single product or service and are not able to make choices for them. Whatever quality the firm serves, the consumer has to accept as the possibility of shifting to other similar products is not there. This also leads to low quality of products and services.

5. Lack of Improvements

Although the scope of improvements is high as research can be done for better quality and new techniques, many organizations are not involved with the upgrades. The same traditional methods are used for a significant period, and no efforts are put up to provide better quality.

Conclusion on Pros and Cons of Natural Monopoly

It doesn’t occur due to any false practice or situation created by people trying to make profits, but instead, it occurs due to certain unavoidable conditions. The governments usually approach these kinds of firms and take preventive measures to ensure their existence. A competitive market is always better than a monopoly as there are several choices, and the prices are also competitive.

Frequently Asked Questions

What is meant by natural monopoly?

A natural monopoly exists in a market if a single firm can serve that market at a lower cost than any combination of two or more firms.

What is a natural monopoly example?

Water and sewage services, electricity transmission and distribution, and energy delivery are examples of natural monopolies in the utility sector. The utility monopolies provide water, sewer service, electricity transmission, and energy distribution such as retail natural gas transmission to towns. Furthermore, having utilities as natural monopolies may benefit society.

What are the advantages of natural monopoly?

Because it can provide a specific service or product at a cost far lower than any prospective competitor and in bulk to meet the demand of an entire market, a natural monopoly may operate unchecked in the market. A natural monopoly can more efficiently serve the whole market than any single or group of businesses.

What are the disadvantages of natural monopoly?

A disadvantage is either the cost for consumers will be higher than what it would be with multiple suppliers competing to drive down costs, or there may not be enough incentive for a private company to enter into an industry. For example, in most cases, it would be hard for a company to enter into the natural gas delivery industry because of low-profit margins and intense competition from other companies already serving the market.