Vocabulary
to endeavor(endeavour) to gain to be familiar with sporting contests to be promoted vitally scarce to result from let us consider stock of bread to be constrained rivals market-clearing price
to outbid pursuit of to pit against at the expense of others by-product to succeed to excel bureaucratic productive efficiency despite to achieve one’s goals violence and crimes to destroy |
стараться, пытаться стараться получить выгоду быть знакомым с чем-то спортивные состязания повышать в чине, звании жизненно важно скудный, ограниченный зд. являться следствием, происходить от давайте рассмотрим запас хлеба быть ограниченным конкуренты, противники гибкая цена, с помощью которой устанавливается равенство спроса и предложения на рынке предлагать более высокую цену стремление к чему-либо стравливать, противопоставлять за счет других побочный продукт преуспевать, иметь успех превосходить других, выделяться бюрократический эффективность производства несмотря на достигать своих целей насилие и преступление разрушать |
Questions to the text
What is the most important concept around which all modern economics is built?
How did Samuel Johnson define competition?
What economic processes result from competition?
What determines the price of any product?
How can you define the market clearing price?
Why many critics argue that competition is one of the central evils of the system?
Is the presence or absence of competition determined by the type of social system?
What is the counter-process of competition vital to a productive economy?
Is amount of competition more important than its quality?
How competition can destroy wealth?
4 Natural Monopoly
In economics, a natural monopoly is a persistent situation where a single company is the only supplier of a particular kind of product or service due to the fundamental cost structure of the industry. Natural monopolies are often contrasted with coercive monopolies, in which competition would be economically viable if allowed but potential competitors are barred from entering the market by law or by force.
Natural monopolies exist when the largest supplier in an industry, or the first supplier in a local area, has an overwhelming cost advantage over other actual or potential competitors. This takes place in industries where capital costs predominate, creating economies of scale which are large in relation to the size of the market, and hence high barriers to entry. The best examples are water services and electricity. It may also depend on control of a particular natural resource. Companies that grow to take advantage of economies of scale often run into problems of bureaucracy; these factors interact to produce an "ideal" size for a company, at which the company's average cost of production is minimized. If that “ideal” size is large enough to supply the whole market, then that market is a natural monopoly.
All industries have some costs of investment which must be met for firms to enter them. Industries with higher investment costs tend to have less competition (compare airplane manufacture with a lawn mowing service). Some industries have investment costs which are so high that if more than one firm tries to supply the same market, all except one (the one with the deepest pockets) will be driven into bankruptcy, because none will be able to make a profit. Such industries are known as natural monopolies.
Why can only one firm survive in a natural monopoly? Because prices will be driven down to a minimal profit level per customer, covering the daily costs of providing the service (marginal costs) but not the huge initial investment (fixed costs). When a firm has made a large investment it is prepared to accept an absolute minimum price from each customer rather than have no income at all; each customer may contribute a little to paying off the investment, but not enough. In this situation, firms will not have the income to service the debts they took on to finance the investment. This will drive all into bankruptcy (or merger), except for the last one left standing, which can then charge a monopoly profit and recoup its investment costs. In essence, a firm must be able to at least charge its average cost to survive in the long run. Because competitive firms must charge marginal cost, they are bound to fail in their attempt to compete, and a monopolist will appear.
Why does this not happen in other industries? It is a combination of very high costs and a standardized product or service (electricity from one company is no better than electricity from another). A standardized product means competition is very high. In natural monopolies, the product is standard, and the industry's high costs cannot be covered if there is competition. Only a monopolist can charge high enough prices to sustain the industry.
Such a process happened in the water industry in the nineteenth century Britain. Up until the mid-nineteenth century, Parliament did not want municipal involvement in water supply. As a result, in 1851, private companies had 60% of the market. Competition among the companies in larger industrial towns lowered profit margins, as companies were less able to charge a sufficient price for installation of networks in new areas. Such situations resulted in higher costs and lower efficiency. With a limited number of households that could afford their services, expansion of networks slowed, and many companies were not profitable. With a lack of water and sanitation, municipalisation took place after 1860. It was municipalities which were able to raise the finance for investment.
As with all monopolists, a monopolist who has gained his position through natural monopoly effects may start to behave that some may see as the abuse of his market position. This leads to calls from consumers for government regulation.
Adopted from www.wikipedia.com