Answer to Question #56988 in Microeconomics for Aiyappa

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’s argument? What are the social costs of monopoly power?

Answer 1

If 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, the CEO’s argument is not rational from the view of the citizens, because they would pay the higher price for electricity. But from the view of CEO the argument is rational, because he wants to maximize monopolists profits.
The decrease of output and increase of price are the social costs of monopoly power.