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These firms may also sell bonds to help fund operations. But because the natural monopoly provides an essential service (i.e., electricity or water) and possesses the required infrastructure to deliver that service, the government will often subsidize the firm’s operations. In fact, many natural monopolies are not. Just because a company is a natural monopoly doesn’t mean it will be profitable. Without competitors to offer choices, the government is the only option to ensure that a quality product at a reasonable price is delivered to consumers. This is the case for utility companies such as electric and water, railroads, and gas and oil companies. To ensure that natural monopolies do not take advantage of consumers, they are regulated by the government. Both are natural monopolies within their own region and are different utility companies that do not compete. while a different one supplies the northwest. One electric company may supply the northeast region of the U.S. Operating on a large scale doesn’t mean the natural monopoly is the only company supplying some specific service or product. Gas and oil companies must build out pipelines and refineries.įor a natural monopoly to recoup those high fixed costs, it must operate on a large scale. Railroads must do the same for rail tracks and train cars. For example, utility companies such as electric companies must build miles and miles of power lines and substations. These costs are a result of the massive infrastructure needed to create a natural monopoly. By the time any competitors come along, the one firm has already taken virtually all consumer demand, built out an elaborate infrastructure for delivering its services, and has become regulated by the government.īarriers to entry come in the form of high fixed costs. For those two reasons, competitors are not able to enter the market. A natural monopoly creates high barriers to entry and generally operates at a large scale.
There are no other competitors within the market.
This one firm supplies all consumer demand in the market. As well as there are given some recommendations to reduce the social burden for certain household groups while raising prices in the transition from a monopoly to the market, and the amount for the state subsidy for poor households.A natural monopoly is a market that is controlled by one firm. The consumer surplus and its change are calculated. A methodology is given for calculating the electricity demand function for households and prices in an equilibrium market. For this purpose, the volume of household electricity consumption by various incomes was calculated, the electricity demand function of households and the marginal cost of generating electricity were constructed. The objectives of the study are to analyze changes in consumer surplus and protect the social interest of poor households in the transition from a state monopoly over the electricity sector to the market. The Institute of Economics of Azerbaijan National Academy of SciencesĪzerbaijan State University of Economics (UNEC)