Natural monopoly

In economics, the term natural monopoly is used to refer to two different things. This has been a source of some ambiguity in discussions of "natural monopoly." The two definitions follow:

* An industry is said to be a natural monopoly if one firm can produce a desired output at a lower social cost than two or more firms—that is, there are economies of scale in social costs. Unlike in the ordinary understanding of a monopoly, a natural monopoly situation does not mean that only one firm is providing a particular kind of good or service.

Rather it is the assertion about an industry, that multiple firms providing a good or service is less efficient (more costly to a nation or economy) than would be the case if a single firm provided a good or service. There may, or may not be, a single supplier in such an industry. This is a normative claim which is used to justify the creation of statutory monopolies, where government prohibits competition by law. Examples of claimed natural monopolies include telecommunications, water services, electricity, and mail delivery. Some claim that the theory is a flawed rationale for state prohibition of competition.

* An industry is said to be a natural monopoly (also called technical monopoly) if only one firm is able to survive in the long run, even in the absence of legal regulations or "predatory" measures by the monopolist. ". It is said that this is the result of high fixed costs of entering an industry which causes long run average costs to decline as output expands (i.e. economies of scale in private costs).