Here is a picture-example of "natural" monopoly. The example assumes that there is one indivisible cost, but that once it is paid, the firm can produce an unlimited amount at a constant marginal cost. Thus, the Long Run Marginal Cost is horizontal, but the Long run Average Cost is downward- sloping
The dilemma is that output Q1, where MC=price, is still the efficient output. But at that output, the monopoly cannot cover its total costs. On the other hand, a profit-maximizing monopoly will produce much less, at Q3, which covers costs but it inefficient.
In different countries and at different times, governments have dealt with this problem in three primary ways:
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