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Are Natural Monopolies Inefficient?

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Are Natural Monopolies Inefficient?

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It has been pointed out that natural monopolies are economically inefficient, because in long-run equilibrium P > MC. Economic profits are possible, and equilibrium output is unlikely to occur at minimum ATC. If economies of scale are truly substantial, price may be lower than would be the case under perfect competition, albeit greater than MC. Therefore, it is theoretically possible that economies of scale could be so substantial as to lower the marginal and average cost curves (relative to perfect competition) that price would be lower than it would be under perfect competition. Consumers may be faced with the choice of a lower price at which P > MC or a higher price at which P = MC, with a greater or a lesser output, respectively. A patent system, under which monopoly rights are given to specific inventions for a specified period, may also be efficient. Incentives to discover, invent, and bring a product to market would be lessened considerably under a competitive situation where no

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