Question

QUESTION 3
Singapore Power (SP) is the only operator in the domestic electricity market in Singapore. Electricity distribution generally is associated with extremely high economies of scale because of the infrastructure (a nationwide power grid) needed to deliver power to individual households. Using the theory and models of market structure, examine this firm. Should government be worried about any aspect of how a firm under this market structure will perform? What should government do to address such worries?

Answer 1

As we know when there is only one seller for a good or services, the market structure is called monopoly and the seller, a monopolist.

In the given question, Singapore Power is the only seller of a good, electricity. Therefore, we can say that SP is a monopoly firm. We also know that there are some sectors such as railways, distribution of electricity etc., in the economy, where it is not possible to have perfect competition with the presence of unlimited firms.

In such situations government makes regulations to ensure public welfare along with the long term stability and profitability of the monopolist firm.

We also know that the monopoly power of a firm, is its ability to set the price of its product above the marginal cost.

Here, the Singapore government should set a upper price limit per unit electricity distributed, so that the monopolist doesn't exploit the consumers by charging too high prices, neither does the firm deal in distributing less than optimal amount of electricity. Government can also take measures to ensure minimum profitability for the monopolist firm thereby ensuring long term viability of the firm.