Question

Pengurusan Air Selangor Sdn Bhd (“Air Selangor”) is a state-owned water management company. 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?

b) One of the main issues that are always associated with the state government-protected monopolist like Air Selangor is inefficiency. Explain why this is the case (inefficiency) and how to overcome them.

c) In lieu of (b), unlike Air Selangor that is state-owned, what about technological (tech) monopolists such as Google or Netflix? Why are consumers generally okay with tech monopolists but not with government-protected monopolists?

Note: Please use sources from reputable news outlets (i.e., Forbes, The Edge, NST) to answer these questions (wherever relevant).

Answer 1

a) It is not always possible for a monopolist like Air Selangor to achieve economies of scale at all times as even though it is serving the country and adjoining territories on its own, the price which it will charge will be determined by the government as it is state owned. Thus the government will sometimes have to resort to people's demand if there is high inflation which will lead to less than optimum price for its services, wherein they won't be able to save on costs because of economies of scale as they will earn less than optimum revenue for its services.

b) There is inefficiency because the market price is not obtained for its services, it is always lower than the profitable price which leads to inefficiency as the operating costs increase of such enterprises as it is not often profit making, which makes them rely on government agencies in order to fund them in dire needs and their debt burden goes on increasing as they can't charge a higher premium price for its service to recover the costs, otherwise the government will be blamed, which will throw them out of power. This inefficiency was recently observed wherein consumers were charged a higher bill, even though they had not used their services. One can overcome such problems if corruption is reduced in such enterprises and employees are rewarded for their contribution.

c) Government protected monopolist employees often don't have the incentive to perform as they don't own the company and even if the company is loss making, they don't lose out on their profits. This is not the case in tech monopolists as employees are incentivised when the company reports healthy figures. This guarantees consumers get value for their money over the long run from tech monopolists as they pay less for quality service, which is not the case with state enterprises as their quality of service is low and there are several inefficiencies.