- Natural monopoly
- A natural monopoly is a market where average cost is falling over the whole range of output that satisfies demand, so one firm supplies it most cheaply.
- Legal monopoly
- A legal monopoly is a market where laws prohibit or severely limit competition, so the barrier to entry is the law rather than cost.
Pricing rules for a natural monopoly
Can you name the three pricing rules for a natural monopoly?
Each rule picks a different point on the same demand curve.
The profit-maximising price is the one a firm left alone charges, at the output where marginal revenue equals marginal cost.
Can you think of an example?
Left unregulated, a regional water company could charge well above its costs.
The allocatively efficient price equals marginal cost, so buyers value the last unit at what it costs to make.
Can you think of an example?
Charges covering only the wear each extra train causes would not pay for the rail track; government grants to Network Rail cover much of the rest.
The fair-return price equals average cost, so the firm covers its costs, including a normal profit, and no more.
Can you think of an example?
Ofgem limits what electricity networks such as National Grid earn to efficient costs plus a normal return.