Natural Monopoly

Infrastructure facilities are also characterized by unique economic characteristics. In particular they show limited competition, economies of scale and high barriers of market entry. From this background infrastructure facilities are characterized by a natural monopoly market position.  

 

By a natural monopoly we mean generally an industry where a single supplier is the most efficient form of production (e.g. economically it is not useful to operate a tunnel just next to another in particular if it is not operated at full capacity).

 
A natural monopoly shows the following economic characteristics:


High barriers of market entry: Infrastructure facilities are highly capital intensive and involve a large initial investment (sunk cost). In addition lag time in construction and potential upgrading are long. The most efficient form of supply for the services provided is given by one single supplier.


Economies of scale: Infrastructure facilities obtain cost advantages due to expansion. “Economies of scale” refer to the fact that a producers average cost per unit falls as scale is increased. (e.g. an operator of a toll road faces virtually no additional cost if the number of vehicles increases).


Inelastic demand for the services provided: Infrastructure provides the basic goods and services which are needed to ensure economic growth. Accordingly, the demand for infrastructure is comparatively constant and price inelastic. (e.g. every household and enterprise relies on continuous supply of water virtually independent of the current business cycle).

 

The fact that infrastructure assets are vital for the functioning of economic processes implies furthermore that most of the infrastructure facilities are subject to market regulation in terms of both output pricing and service standards.

 

  

 


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