Assignment.docx - 1 A certain town in Kerala obtains all of its electricity from one company South Electric Although the company is a monopoly it is

Assignment.docx - 1 A certain town in Kerala obtains all of...

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1. 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 youagree 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?Solution: I do not agree with the CEO’s argument. Even though the company was operating in a monopoly the profits where shared by the citizens. 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, CEO’s argument is not rational from citizen’s point of view, because they would have to pay the higher price for electricity. But in CEO’s point of view the argument is rational, because he wants to maximize monopolist’s profits. Under a monopoly market resources are misallocated causing loss of social welfare. When an industry is monopolized, price rises above and output falls below the competitive level. When the company charges the monopoly price then company will be producing a smaller quantity than the competitive equilibrium. Those who continue to buy the product at the higher price suffer aloss, but this loss is exactly offset by the additional revenue that the monopolist obtains by charging the higher price. The decrease of output and increase of price are the social costs of monopoly power.In a monopolized industry, price increases above and output reduces below the competitive level. Those consumers who carry on buying the product at the higher price undergo loss, but this loss is correctly offset by the additional revenue the monopolist obtains by indicting higher price. Other consumers, who are ricocheted by the higher price to substitute goods, suffer a loss, and it is not offset by gains to the monopolistOther consumers, who are deflected by the higher price to substitute goods, suffer a loss, that is not
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