What factors cause monopolies to form in an economy?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Economists argue that there are different types of monopolies -- some are "natural," which implies that others are not natural.

Some monopolies are natural because they are in markets that reward economies of scale.  This can be seen, for example, in a market like electricity distribution.  It is much more economically sensible to have one supplier for electricity so that only one set of electric power lines has to be built.  If there were more companies building power lines, each company would have fewer customers per line and the costs to each customer would be higher.

By contrast, some monopolies are simply granted by the government in some economies.  This tends to happen in countries where there is greater government control of the economy.  For example, in Mexico, there is only one company that extracts oil  -- it is PEMEX, a government-owned entity with no competitors.

So some monopolies exist naturally, but others are set up by governments.

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