Question

Please discuss how monopolies influence the cost of electricity and what types of policies support/or disincentivize monopolies.

Answer 1

production and distribution of electricity is something that cannot be privately provided to a large number of consumers. Due to this reason they are generally very few companies that are able to produce and distribute electricity. this is also because there is a huge investments involved in the beginning and the per unit cost is almost minimal. This enables the suppliers to gain market power and become monopoly

sometimes these are natural monopolies because they are operating in the sector where they have to supply a large number of consumers thereby their average cost goes on declining with production. Because of the Monopoly power they are able to reduce the per unit cost of electricity. this initial startup cost is so huge that it prevents entry of other firms. This is not however beneficial for the consumer's because these monopolies charge a high price from consumers in spite of having a lower per unit cost.

To disincentivize them, government uses of policy of marginal cost pricing or average cost pricing. Both of these policies result in increasing the quantity supplied and reducing the price charged by the Monopoly. while the average cost pricing requires the Monopoly to charge a price equal to the average cost, marginal cost pricing requires the Monopoly to charge a price equal to the marginal cost. Average cost pricing results in zero economic profit and marginal cost pricing brings in losses. Both these practices are used to curb the Monopoly power.