Question

1. why would the distribution of electric power be a natural monopoly?

2. Why would the generation of electric power not be a natural monopoly?

Answer 1

a) Distribution of the electric power will be considered as a natural monopoly because it requires a huge sum of capital to start distribution for example, the firm will need to establish distribution lines, they will have to maintain those lines and employ labors and technology, but once this is done the marginal cost will be low i.e the firm will produce better with an economies of scale, that is why they are natural monopolies.

b) Generation can be dine by many small firms as effectively as a large firm will do, it can be a monopoly but not a natural monopoly. for example, there can be many power supplier using wind, solar or nuclear energy.