Answer to Question #204620 in Microeconomics for Lungiswa

Question

(a) Briefly describe how governments are involved in creating monopolies. [10] (b) Eskom is a well-known government created monopoly in South Africa. Briefly explain how Eskom as a monopoly has impacted on the South African economy, since 2009.

Answer 1

a) The government can create a monopoly by granting exclusive rights to a single corporation to produce a certain good. Patent laws also provide the government sole ownership of inventions, which helps to avoid market failure that would otherwise occur in certain marketplaces.

b) The country's only electricity provider is Eskom. The debt to EBITDA ratio has risen to approximately 15 times. Interest payments on this loan account for almost 90% of Ebitda. Debt servicing obligations are around two times Ebitda, suggesting that paying down existing debt necessitates taking on more debt.