Research Papers

Research Paper on Natural Monopoly

A monopoly is a kind of market structures which characterizes such conditions of competitive struggle between firms of the one field in the market conditions:

There is one seller of unique produce, it means that it doesn’t have alternatives. And only one firm can sell it.

There are insurmountable entrance barriers into this field (on the market of this produce) such as the effect of caliber (the necessity of large capital investment for the keeping economical activity in this field), superiority of monopolist (exclusive domain upon the patents or control on materials) or unfair competition and so on.

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A natural monopoly is a monopoly that exists because the cost of producing the product (i.e., a good or a service) is lower due to economies of scale if there is just a single producer than if there are several competing producers. [2]

World experience shows that activities of firms, which work in conditions of natural monopoly, have to undergo the limiting and regulative influences from the state. Limiting and regulative influence upon the spheres of the natural monopolies is put into effect in two directions:

Making special plenipotentiary regulating organs. They must control the work of firm-monopolists.

Regulation from the state (municipality) by realization its rights as owner upon the states (municipal) factory.

The first way is used for the regulation of natural monopoly in USA, and in Europe the second method is preferable. The selection of the state control depends on the country natural peculiarities, economical condition, industrial technology and who is the proprietor in the field of natural monopoly.

Regulation of Natural Monopoly in USA
The regulation of public use factories (naturally monopolies) by special state organs in USA has more than century-old history. Very consistently state regulation is used in fields of public utilities, connection, natural gas industry, power and water supply. First the name Public Utility (PU) was used in XIX century concerning the firms, producing goods or services, in which the majority people are interested.

The juridical base of state regulation of private firms, which act in conditions of natural monopoly, is Constitution state duty to guarantee the protection of prosperity, safety and health of citizenry. The same duties have the local authorities. Taking into consideration that natural monopoly are peculiar to local markets and the system city water-supply also belongs to them, so the forming of state regulation in USA began “from below” – from the level of separate states.

The foundations of control system, which based upon the court examinations on all fours cases and upon summarizing this practice, was built in USA since XIX century.

The Organizational Foundations of Regulation System
The Public Service Commissions of separate states were made in the beginning of XX century. Each Commission acted on the grounds of the Statute, approved by legislative body of the state, where its objects, problems and aims were determined. Senate also can solve problems of attribution the concrete kinds of works to Public Utilities’ duties.

In 35 states the members of Commission were appointed by governor of state and confirmed by Senate, in others 15 they were selected on the direct elections.

The financial system of Commission was formed by controllable companies’ revenues based on the Senate’s determinations. It obliged companies to transfer money on its account. The work of Commission was based on principles of judicial authorities.

The main aim of its work, according to the Statute, was the guarantee of safety, adequate and righteous level of public utilities and the opportunity of getting just income upon the investment in factory, which gives to services for the wide circle of consumers.

Nowadays in USA in the field of water-supply such division of control system powers has formed: on the federal level nature-protective norms and safety rules are established. And the state commissions control the work of corresponding companies.

The Main Functions of Regulative Commissions

  1. The technical licensing on basis of state standards.
  2. Making the decisions about the price changing or abolition acting tariffs.
  3. The examination of financial condition of the company.

In the process of making the water-supply tariffs at the heart of state control the conception “fair value” is placed. It must keep up both consumers and investors interests in getting the rational profit on their investments and necessity of PU functioning and development.

In the judgment of the economists, in the fields of water-supply the natural monopoly is the steadiest conditions of the market, because there is no product similar with the water by the consumer qualities. On this account the market terminates the factors of competition. In the most countries such factories are in public property and very often functionate as unprofitable.

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