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Chapter 15: Problem 3

What is a public franchise? Are all public franchises natural monopolies?

Short Answer

Expert verified
A public franchise is a license granted by the government allowing the provision of specific services or goods in a certain territory. This often applies to industries with high infrastructure costs, resulting in natural monopolies. However, not all public franchises are natural monopolies as factors like market conditions, technological advancement, and regulations can encourage competition in these sectors.

Step by step solution

01

Define Public Franchise

A public franchise is a type of license or privilege granted by the government to a person, group, or company. It gives the right to provide specific goods or services in a given territory. Examples include public utilities and public transportation.
02

Define Natural Monopoly

A natural monopoly occurs in an industry where high infrasctructure costs and other barriers to entry give advantage to a single company to serve the entire market more efficiently than smaller, competing firms. Utilities like water, electricity, and public transportation often work as natural monopolies because constructing the infrastructure (such as pipes, grids or transportation networks) is expensive, and it's more efficient to have a single provider.
03

Discuss the Relationship between Public Franchise and Natural Monopoly

While it's true that many public franchises operate as natural monopolies because the nature of their services and high costs of entry deter competition, not all public franchises are natural monopolies. Market conditions, technological changes, political decisions or regulations can alter the level of competition in sectors traditionally seen as natural monopolies. For example, deregulation and technological innovation have introduced competition in sectors such as telecommunications, which once were considered natural monopolies.

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