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Finance Dictionary and Glossary of Investment Terms
A government-granted monopoly. The most important reason for the government granting a monopoly is in the case of the product or service being a natural monopoly, i.e. unable to sustain more than one producer. This is usually the case when very large economy of scale is needed to make production efficient (so the marginal cost of producing each additional unit is very low). Thus, given the huge scale of production needed for efficiency, it could be that the entire market demand would be fulfilled by a single efficient producer, making it unfeasible to have a second producer in the market. Thus, the government may decide to simply give a producer a monopoly, so that the producer is convinced of the fact that there is adequate market to achieve efficient scale. A government may also choose to grant monopolies in special conditions such as when they want to encourage a specific kinds of innovation (patents are effectively a government-granted monopoly), give preference to a producer who might also be involved in community development activities etc.