ABSTRACT

When the fixed costs of providing a service are very large relative to costsrelated to how much one produces, a market might inevitably have just asingle supplier. As we saw in Chapter 6, the wire sectors of the electricity industry-long-distance transmission and local distribution-are in just that category. When faced with a so-called natural monopoly, particularly over crucial goods and services such as electricity distribution, the policy response may be to regulate prices and terms of service directly rather than to leave such matters to an inadequately competitive market.