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March 28, 2017

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How can you justify the existence of government-granted monopolies for public utilities such as natural gas distribution and electricity in the light of traditional economic argument that the more competition there is, the more likely it is that an efficient allocation of resources will occur?

  • economics - ,

    Governments support these monopolies because they are natural monopolies, i.e. in these markets the efficient market structure is a monopoly. These markets all involve high initial captial outlay and very low marginal costs, and if there was more than one firm in the industry then the costs would be higher than if there was one. To prevent exploitation of the monopoly status and profit maximization, the government regulates the monopoly to where it breaks a normal profit. This is more allocatively efficient than a normal monopoly. It still is less efficient than perfect competition, but its a good way to keep costs low.

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