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2 The Theory of Natural Monopoly and Literature Review - Pg. 15

Chapter 2 The Theory of Natural Monopoly and Literature Review THE NATURAL MONOPOLY CONUNDRUM Historically, conventional wisdom has held that certain markets were "naturally monopolistic," which means that, due to the presence of high fixed costs of which the average declines with increases in output, efficiency is best obtained when there is only one supplier. According to Kahn (1970, p. 15), ... the public utility industries are preeminently characterized in important respects by decreasing unit costs with increasing levels of output. That is indeed one important reason why they are organized as regulated monopolies: a "natural monopoly" is an industry in which the economies of scale are such that one company supplies the entire demand. It is a reason, also, why competition is not supposed to work well in these industries.