Natural Monopoly vs Perfect Competition: P, MC and AC
An interactive comparison of a long-run PC firm, where MC crosses the bottom of ATC, and a natural monopoly, where AC falls forever and MC never reaches it.
Tech Stack
Where MC meets AC, and where it never does
Move the price on the left, pick an outcome on the right (or click a point), then change the costs.
PC firm (long run)
P = MC = min ATC
- q (P = MC)
- 2.83
- ATC at q
- 5.66
- profit
- €0.00
- ✓Allocative: P = MC always
- ✓Productive: producing at min ATC
Long-run equilibrium: zero economic profit, no one enters or exits.
Natural monopoly
AC falls forever: MC never reaches it
- Q, P
- 20.00, 60.00
- AC at Q
- 37.50
- profit
- €450.00
- DWL
- 400.00
- 2 firms' AC
- 55.00 (each serves Q/2)
- ✗Allocative: P > MC
- ✗Productive: AC is still falling, so there is no bottom to reach
- ✓Viable without help: yes
Shading: green = profit, orange = loss, blue = deadweight loss.
Reading the two graphs
Left (PC firm, long run): , so and . The flat price line touches ATC exactly at its bottom, where MC crosses ATC: , and both efficiencies hold.
Right (natural monopoly): , , . AC keeps falling and stays above MC everywhere. There are three possible outcomes:
| Outcome | Rule | Result | |||
|---|---|---|---|---|---|
| M: unregulated | 20 | 60 | 37.5 | Profit, → big DWL | |
| A: regulated | 35 | 30 | 30 | , but still and AC still falling | |
| E: efficient | 40 | 20 | 28.75 | Allocatively efficient, but → loss → subsidy or shutdown |
The key difference: on the left MC crosses ATC at the bottom of the U. On the right MC never reaches AC, because AC has no bottom.