benefit by having a larger amount of fixed capital allocated to producing
this good.
A government-owned natural monopoly may be prepared to make such
investments, as it presumably has a mandate to protect society’s overall
interests. A regulated but privately owned firm, on the other hand, has
little or no financial incentive to undertake investment if it will only break
even. As a result, socially desirable investment will not likely occur when
the firm is required to use average-cost pricing.
For natural monopolies, average-cost pricing often leads to inefficient long-run investment
decisions, with too little capital being built.Very Long-Run Innovation
In many places in the last few chapters we have discussed the importance
of innovation and technological change. In particular, we mentioned how
innovation can lead to the erosion of market power through Joseph
Schumpeter’s process of “creative destruction.” Technological changes
have led to the evolution of many natural monopolies into more
competitive industries.
A striking example is found in the telecommunications industry. Thirty
years ago, hard-copy message transmission in Canada was close to a
natural monopoly belonging to Canada Post, a Crown corporation.
Today, technological developments, such as efficient courier services,
email, scanners, and online banking and bill payments, have made this