Free Essay: What is Natural Monopoly?
Do you know what is a Natural Monopoly?
As asked above, do you know what is natural monopoly?
Industrial processes’ diversification is facilitated by competition in various business environments. Through competition, different products are in a way introduced to consumers. Nevertheless, under some circumstances the consumer of the final industrial services and goods bears the consequences of high competition in the industrial processes. While the case continues to unfold, business environments’ competition appears in varying forms. Among the forms of this competition at the marketplace is natural monopoly (Posner, 1999, p. 221).
Although the aim of consumers is to maximize personal satisfaction levels, increased commodities’ prices diminish their desire to buy different products. When there is natural monopoly, startup operation’s cost becomes so high that companies that operate in a similar industry start withdrawing. This is because there might be a very low probability of a company to operate under conditions of increased cost of production especially if it is a new company in an industry. It can withdraw from that particular industry due to an increase in the economies of scale. This is what most companies avoid in all circumstances.
Rationally, making another move under the condition of natural monopoly is completely unprofitable. Therefore, a firm opts to withdraw (Posner, 1999, p. 223). The withdrawal is due to the fact that a second move is usually disadvantaged in the setting of price because there are already set prices. The quest for controlling the interest of consumers rises for first mover companies. As a way of trying to recover financial capital, the firms raise prices of the services and goods that they offer to consumers.
Where natural monopoly exists, only companies that can raise sufficient capital endure the risk that is involved in initiating a business because they are able to generate goods while offering the required services to consumers. With all the admirations as well as complete participation in the control of prices in the market by the monopolistic companies, the government can act with its aim being to lower the prices of commodities while at the same time enhancing the welfare of consumers.
According to market trends, companies that operate under the circumstances of natural monopoly mostly manipulate the interests of consumers. They also offer services and goods at very high prices. In case under such conditions the government intervenes by establishing price ceilings, then consumers can be relieved (Eliassen & Sitter, 2008, p. 59). As such, establishment of an operational base as well as checks on availing basic services and goods in a manner that can be appreciated by consumers is necessary. This has always been the major reason the government has been providing very sensitive services and goods as well as controlling expensive industrial operations.
Government agencies are responsible for managing the expenditures of the public goods with little privatization’s concerns. The services and goods are considered as public provisions and this is how different constitutions outline them. Nevertheless, there are circumstances under which public provisions can be privatized. This is when public good’s ownership is transferred to individual organizations or industries. If public good’s ownership is transferred by the government to private industries, it is expected that a private industry in question will operate under government’s controls to ensure that the charged prices are not higher than what was being charged by the government prior privatization. Among the services and goods that are publicly provided include electricity, telecommunication services, postal services, railway and roads.
How Reforms in Network Industries (postal, Telephone/Ecom, Railway, Electricity) have Modified and or Adapted to the Nutritional Traits of being Natural Monopoly. Use at Least Two Industries
For several decades, there have been major reforms globally in the network industries. Progress in technology has been vital in bridging the gap between countries in transportation and communication sectors as well as services and goods’ production. With a globalization mindset, the world is becoming more industrialized with advancements in technology being witnessed in production and communication areas. Although starting different network industries has become costly and companies are attempting to stop providing the same, the demand for these services by consumers is always increasing with different global societies embracing progress in technology in the communication industries.
The increased network services’ demand diminishes the bargaining power of consumers and companies that offer such services are using this opportunity to increase prices and exploit consumers. In responding to increased communication prices, different governments have come up with policies of controlling price while ensuring that network services’ providers such as the telecommunication industries and postal industries charge consumers affordable prices.
Due to globalization, the network industry has also enjoyed favors from consumers from all parts of the world. Most people are now using computers in communicating. The contribution of this industry has been to make service delivery reliable, efficient and fast in various industries. Network industries operate on a complex model especially the telephone and postal industries. These industries get financial support from governments. This enables them to deliver services efficiently. Therefore, the public favors provision by the government for communication services rather than from the private firms.
Public goods’ provision is given higher protection by the constitution. Most articles stipulate that public services and goods’ provision should always be the government’s responsibility. These services and goods are considered sensitive for the operations of the citizens and increasing their prices can pose a serious national security’s threat. In a way, this can disadvantage private investors with interest in exploiting communication services’ consumers through such an opportunity. In entirety, different constitutions have abolished the privatization of some sensitive industries because such steps protect the public from over exploitation by the providers of these services.
Although makers of economic policies advocate for the operations of a free market, some experts such as Adam Smith support invisible hands in the operations of the market. These invisible hands are the actions of the government that set prices in the market (Eliassen & Sitter, 2008, p. 68). This prevents industrial exploitation of consumers. When the government does this, it eliminates other companies in the market that may have been interested in exploiting consumers while providing services.
Postal industries play a vital role when it comes to delivering information. Although technology is advancing and modern communication means such as the internet and telephone are getting more attention from the society, the postal industry is still playing the basic roles that it used to play in the dissemination of information more so where high confidentiality level is required for the information.
Receiving and sending information all over the world would be very costly if the operations of postal industries were under private companies. Nevertheless, the opposite is what occurs. Currently, using letters seems to be a cheaper way of communicating. Letters are dispatched at a reduced cost due to subsidies by the government. In the beginning of the 1970s, the UK and the US governments entered a deal which made disseminating information less costly for the citizens in these countries. Different deals that the two countries struck as well as the trade unions’ information have been vital in the reduction of the communication expenses.
Although posting letters is currently a less costly communication means, it has several disadvantages. The information that is delivered via this means is very low. Therefore, this means is inappropriate for sending urgent information. Consequently, the attentions of the governments are shifted to the telephone industry. Cell phones’ introduction reduced the need for government’s complete supervision of the telephone industry because there is a cell phone in every household which is used for most communications.
Using personal communication lines and cell phones complicates supervision of the market monopoly by the government because cell phones are operated under the private industries. The whole public management process is facing private sector’s opposition and competition in the network industries. Although there are positive effects on globalization that can be realized from network industries’ privatization, it is still necessary to involve the government t in the operations of the market. Policy makers should formulate plans that will deliver enhanced telecommunication links to the public, well installed networks and comprehensive information flow strategies in different regions. Doing this will reduce the chances of shifting attention to the privately owned or provided communication means by the public. Governments throughout the world have to play a role of establishing an effective communication environment for the public. They should do this by enhancing the processes that facilitate public services and goods’ provision.
In a nut shell, providing communication lines can have a great impact on other industries. Proper and clear communication among the employers, customers, and employees enhances better means of delivering services. As such, it can be realistically said that increasing prices that are charged for communication services can greatly interfere with production among vital industries in the world. The effect on the cost would be passed on to consumers. An increase in prices can be reduced by proper public sector’s management (Chandra, 2004, p. 115). In case global governments form unions that bring them together and establish global standards of communication, the global economy will be greatly enhanced. Thus, there would be no issues of underdeveloped countries (Chandra, 2004, p. 115).
It is possible to subsidize communication costs by establishing trade unions so that transshipping goods through country boarders can be cheaper for the member nations. Cheaper transportation and communication means can affect the buying price that is offered by different markets’ producers. Every government has a responsibility of protecting citizens from companies that practice monopolistic competition at different production levels. Privatizing social services and goods can hurt the economy of a country. The advocacy of policy makers is government’s involvement when it comes to providing public goods that it finances through taxation. Private investors’ involvement in the provision of such goods can be very expensive for a country and its citizens.
Chandra, R. (2004). Globalisation, liberalisation, privatisation and world polity: Vol. 6. Delhi: Isha Books.
Eliassen, K. A., & Sitter, N. (2008). Understanding public management. London, UK: Sage.
Posner, R. A. (1999). Natural monopoly and its regulation. Washington, D.C: Cato Inst.