GENERAL KNOWLEDGE

Detailed explanation-1: -A natural monopoly is a kind of monopoly that arises due to natural market forces. It often occurs in industries where capital costs are predominate, creating economies of big-scale concerning the size of the market. Examples of the natural monopoly include public utilities, such as water services and electricity.

Detailed explanation-2: -Typically a public utility has a monopoly on the service it provides. It is more economically efficient to have only one business provide the service because the infrastructure required to produce and deliver a product such as electricity or water is very expensive to build and maintain.

Detailed explanation-3: -For example, the utility industry is a natural monopoly. The utility monopolies provide water, sewer services, electricity transmission, and energy distribution such as retail natural gas transmission to cities and towns across the country.

Detailed explanation-4: -An example of a natural monopoly is tap water. It makes sense to have just one company providing a network of water pipes and sewers because there are very high capital costs involved in setting up a national network of pipes and sewage systems.

Detailed explanation-5: -A public monopoly is a way (policy) to solve a problem of welfare maximization. In particular, in the case of natural monopolies, the conditions necessary to achieve production efficiency are the same as the ones that impede achieving efficiency in the allocation of resources.