Natural Monopoly | A-Level Economics Notes
These revision notes cover everything you need to know about Natural Monopoly for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is a natural monopoly?
A natural monopoly is a market structure where the most efficient number of firms in the market is one.
A natural monopoly has an L-shaped LRAC curve. Natural monopolies like train companies have extemely high fixed costs due to the infrastructure needed to set up their business. This means that it's economies of scale will outweigh its diseconomies of scale even at high levels of output.
The diagram explains that the most efficient number of firms is one as it allows the existing firm to raise output and therefore lower costs, which allows them to move closer to their minimum efficient scale and achieve productive efficiency.
Natural monopoly diagram
What is minimum efficient scale?
Minimum efficient scale (MES) is the lowest point on the LRAC curve. It is also the range of output where a business can achieve productive efficiency.
Where does a natural monopoly operate in the long-run?
A natural monopoly aims to maximise profit so they operate at q1 as this is where marginal costs = marginal revenue.
Regulation of natural monopolies
Maximum prices
Natural monopolies are likely to charge high prices (p1) as they aim to maximise profit, therefore they are allocatively inefficient. This is achieved at qA and pA so regulators can enforce a price cap at pA. This doesn't work in theory as firms would shutdown as AC>AR at qA.
Nationalisation
Nationalisation can be an effective solution as the government can work in the interest of society by charging fair prices, at the point where MC=AR. They can finance the losses through tax revenue.
Summary questions
- what is a natural monopoly?
- natural monopoly diagram
- regulation of natural monopolies
- price caps
- nationalisation
A-Level Economics Tutoring
I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.