Characteristics of economic infrastructure, Microeconomics


Natural monopoly is the situation where the provision of a good or a service has economies of scale, which are realised most when a single firm produces the entire output. If a private firm provides these services, it charges high prices and makes huge profits. Hence, Government intervention is required either to regulate the private firm or to replace it. Large upfront costs and long payback periods associated with infrastructure provision make it difficult to finance and manage. Investment in infrastructure is characterised by lumpiness or indivisibility, which implies that large amounts are required at a time. Externalities occur if the benefits or costs of producing or consuming a good affects person other than the individuals involved in a transaction. In fact, this reveals the "public good" nature of infrastructure. Public good possesses two characteristics viz.,  'non-rival' and 'non-exclusive'. Non-rivalry implies that infrastructure can be enjoyed by an extra person without reducing the enjoyment it gives others. Non-exclusiveness implies that people cannot be excluded from consuming the good. Sunk costs are the costs that have already been incurred and which cannot be recovered to any significant degree. Sunk costs can be taken as the opposites of incremental costs. Incremental costs are the costs that will change due to the proposed course of action. Only incremental costs are relevant to a decision. Thus, large volumes, sunk costs, long periods of amortisation, and prolonged project development makes the infrastructure sector investment highly risky. In addition to these main characteristics, infrastructure services have low elasticity of demand. It implies that the demand for these services is not much affected by the prices.   

Posted Date: 11/10/2012 7:30:23 AM | Location : United States

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