Answer to Question #79751 in Microeconomics for suman chatterjee

Question

A certain town in Kerala obtains all of its electricity from one company, South Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens, it makes economic sense to charge a monopoly price for electricity. Do you agree with the CEO? Why or Why not? If the gains of the producers from monopoly power could be redistributed to consumer, would the social cost of monopoly power be eliminated? What are the important measures you suggest to control monopoly power?

Answer 1

I believe that the argument of the CEO is irrational in terms of citizens, because they will charge a higher price for electricity. If we consider the business position, then the CEO's argument is rational, because he wants to maximize the monopolist's profit. The increase in prices and the decline in output are the social costs of monopoly power. When the company collects a monopoly price, it will produce less quantity than the competitive equilibrium.
In the production and sale of products under monopoly conditions, the monopolist gains profit at the expense of consumers, since they must pay a price that exceeds the marginal cost of production. This leads to a decrease in the welfare of the consumer.
I think that in this case, to control the monopoly, you need to enter:
- control over prices;
- organize an association of consumers.
First, the municipality can control the monopoly, fixing profits and prices and ensuring that the industry will not receive unjustified profits.
Also, one of the effective methods of checking and controlling a monopoly is that the municipality can help in the formation of consumer associations. This should give them some reasonable powers and patronage. It must be responsible for bringing to the attention of the municipality, on the one hand, and society, on the other hand, with the high responsibility of the monopoly.