Question

Pengurusan Air Selangor Sdn Bhd (“Air Selangor”) is a state-owned water management company in Malaysia. It was set-up as the special purpose vehicle of the Selangor State Government, to be the single holistic licensee for the provision of water services in Selangor and the Federal Territories of Kuala Lumpur and Putrajaya, following the water services industry restructuring.

a) Is it possible for a monopolist like Air Selangor to achieve economies of scale—at all time? Why or why not?

Answer 1

Economies of scale refer to the cost advantage that can be achieved by a firm when they decide to increase their level of output.

In a monopoly market, there is only one firm that dominates the entire industry and market. There is a strict barrier to the entry and exit of the firms.

Here the Air Selangor is operating in a monopoly market and it enjoys economies of scale.

The reason is that Air Selangor is a strong water company in the industry of Malaysia. It has started off with getting legal permission from the Government and also boosted its primary capital to a large extent. Therefore, it has a large market territory and infrastructure which makes it stand far above from those small water companies that want to compete against it. These small companies need heavy capital investment and robust infrastructure.

If they do decide to go for it, by the time they start operating, they will be facing the heavy amount of pending repayments of the funds that they used for investment. This will lead to an increase in the price of their product which will discourage the customers. And ultimately, the customers will look for cheaper water companies that will be Air Selangor which is already a full-fledged company with a stable environment.

The other companies won't be able to operate for a long period of time with such an unsteady environment.

Thus, giving the Air Selangor the adavantage of economies of scale.