A local group of concerned citizens is dissatisfied with what it calls outrageous rate hikes by...

A local group of concerned citizens is dissatisfied with what it calls outrageous rate hikes by the electric utility company. Its solution is to have the elected city council operate an electric utility company instead of using the private one. Suppose the group gets its wish—the city council now runs the utility. Cite and discuss 2 externalities which might arise from this situation. Include a clear statemen of the primary activity from the city council. Keep this simple—ignore ownership transfer and similar issues.

Expert Solution

clear statement of the primary activity from the city council-

City council will fix the monthly bill which will be way below as compared to the private one.

private one thinks of its own profit maximization and therefore it is raising prices. city council will be more society -oriented and it will think of the maximisation of society's welfare so it will fix the monthly electricity bill at some reasonable price.

First Externality: - You can expect power cuts now. Because city council is chargig lower prices so in order to save electricity it will cut the supply for say two- three hours a day and people will not complaint either .Aftter all you can't enjoy everything by paying meagre sum.

Second Externality:- There will be no incentive for the people to save electricity. They will keep their electrical appiances on all the time because they are paying less and fixed monthly bill so consuming more electricity will not dig deep in their pockets. There is every possibilty that in order to save money further they will start using some cheaper electronic goods which consume more electricity power . So wastage of electricity will take place.

Rahul Sunny answered 1 year ago

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