A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens,it makes economic sense to charge a monopoly price for electricity. True or false? Explain.

Short Answer

Expert verified

The given statement is false because the electricity produced in a monopoly market structure is much less than that produced in a competitive market.

Step by step solution

01

Step 1. Reason

Northstar Electric operates as a monopoly in the town, and the profits generated are distributed among the citizens. Although the profit earned by a monopoly exceeds the profit earned by a competitive firm, the quantity sold differs. The electricity produced in a monopoly market structure significantly falls short of a competitive firm's equilibrium quantity.

Although the citizens can obtain monopoly profits, they cannot consume the extent of electricity that would have been available to them if the market was a competitive one. Thus, the CEO should consider the deadweight loss (social loss) associated with the monopoly in terms of the low equilibrium quantity, thereby not charging a monopoly price from the citizens.

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