Answer to Question #66577 in Microeconomics for Nisha

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

Although 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, I don't agree with the CEO’s argument, because the monopolistic pricing creates inefficiency and deadweight loss that are the social costs of monopoly power because of higher prices and lower quantities supplied.