Question

What distinguishes a natural monopoly from other monopolies? What are the pros and cons of regulating natural monopolies? Does your answer differ depending on the specific product or industry being regulated?

Answer 1

The high cost of initial investment clearly distinguishes natural monopoly from other monopolies. Here,  high investments make other players choose not to enter the market and monopoly is naturally created. For example, a mineral oil extraction and refinery company can create natural monopoly due to high cost of setting up the required infrastructure, makes other players to go away from the market.

Pros are the lower prices and higher volume of output produced to increase the consumer surplus, but the cons are the risk of firm being shut down if subsidies are not given. These subsidies are nothing but the tax payers' money. So, it is a treatment of redistribution of income.

The regulation is more required where the demand is inelastic in nature and it produces necessity goods. So, regulation is mandatory with subsidies. Though, when the demand is elastic in nature and other substitutes are present, then regulation is not required.