Public utilities are firms that are sometimes synonymous with natural monopolies. Some examples of public utilities include the Tennessee Valley Authority and Illinois Power.

These organizations are generally so called because there is structurally no room for market competition— one firm can “naturally” produce at lower costs than competitors who are eventually priced out of the market. Thus, natural monopolies tend to be regulated by governments in the public interest. However, being a natural monopoly is not a necessary prerequisite for government regulation. Industries that are not natural monopolies may be regulated for a number of reasons, including service reliability, universal access, and national security.

Public utilities generally supply goods or services that are essential, like water, electricity, telephone, and natural gas. For example, the transmission lines for the transportation of electricity or natural gas pipelines have natural monopoly characteristics in that once these lines are laid by one utility, duplication of such effort by other firms is wasteful. In other words, these industries are characterized by economies of scale in production.

Left to themselves, private utility companies would make decisions that are most profitable for them. Such decisions generally involve too high prices and relatively little service compared to competitive conditions. These decisions may or may not be in the best interests of the society. The government or the society would like to see these services being economically accessible to all or most of the population.

Not all utility companies are in the private sector. In many countries, utilities are owned by the government. Generally, in these cases, the government creates autonomous bodies for government utilities to prevent them from day-to-day political interference. In such instances, the government utilities’ goals are better aligned with societal goals; however, they tend to be less efficient than their private sector counterparts.