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4.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 splitFeatures of Monopolistic markets,Large Number of SellersProduct DifferentiationSelling Costs: Advertisements, Sales PromotionFreedom of entry and exitLack of perfect knowledgePricing decisionNon-Price Competition
the profits equally at the end of each year. The CEO of the company claims that because all ofthe profits will be given back to the citizens, it makes economic sense to charge a monopolyprice for electricity. Do you agree with the CEO’s argument? What are the social costs ofmonopoly power?I do not agree with CEO’s argument and his claim is false. 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.When the company charges the monopoly price then company will be producing a smaller quantity than the competitive equilibrium.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 monopolist.This is the known as "deadweight loss" from monopoly, and in terms of conventional analysis the only social cost of monopoly. The loss suffered by those who continue to buy the product at the higher cost is regarded merely as a transfer from consumers to owners of the monopoly seller and has not previously been factored into the social costsof monopoly.