An industry is a natural monopoly if the relevant production process exhibits large economies of scale, or increasing returns to scale, throughout the range of output expected in the market. Industries which might fall into this category are: electrical generation, local phone service, cable TV, and public transportation, though rapid changes in production technologies may mean that these industries will soon be characterized by very different returns to scale. We already see satellite systems competing with cable TV, and cable TV competing with phone companies in providing internet access. Fuel cell technology may even lead to the decentralization of the production of electricity in the near future.
Where natural monopolies exist and exhibit such large economies of scale, it is usually considered far better to allow a monopoly to operate in a regulated environment than to either accept the high prices and low output of unregulated monopoly, or to accept the high production cost, and also high prices, of an industry made up of several, high-cost, small firms.
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