The Evils of a Monopoly
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The evils of a monopoly Meralco is a natural monopoly. Natural monopoly exists when a firm is able to supply the total market demand more efficiently because of economies of scale that allow the firm to lower its cost as it expands capacity. However, like any firm in a market situation where there is imperfect competition or in a less-than- competitive market, a natural-monopoly firm, when left to its own, tends to limit its output to a point where its marginal cost equals its marginal revenue but charge a much higher price than what would have prevailed when there is a highly-competitive market. In a highly-competitive market, the output tends to settle at a point where marginal cost equals marginal revenue, which also equals its price and where the unit cost of production is the lowest possible because of competition. When the price is greater than unit cost and profits are high, more firms will come to compete in the market and drive down the price back to where it is just equal to unit cost. When the price is below unit cost, the resulting losses will drive out some of the firm from the market, thus raising the price back again to where it is just equal to the unit cost of producing the product concerned. Because a natural monopoly, like any firm in an imperfect market, charges a price way above the equality of marginal cost and marginal revenue, it also produces at a certain level of output that is less than what would have prevailed when the market is highly competitive. These twin evils (higher price than necessary and lower output than possible), which arise from the presence of a monopoly, make for a very strong case for government intervention. For the good of the public, the government can do three things when the presence of a natural monopoly is unavoidable such in the power sector. One is to create and operate a monopoly firm or take over the operation of an existing one, resulting in government?s being actually in the business of producing or supplying electricity to the public. Another is regulating the operation of the monopoly firm in terms of what level of prices it can charge and profits it can make, as what is being done currently to all power distribution firms operating in the provinces and cities in the country. Finally, the government can simply discourage firms from increasing the extent of their monopolization through legislations,
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monopoly
Transcript of The Evils of a Monopoly
The evils of a monopoly
Meralco is a natural monopoly. Natural monopoly exists when a firm is able to supply the total market demand more efficiently because of economies of scale that allow the firm to lower its cost as it expands capacity. However, like any firm in a market situation where there is imperfect competition or in a less-than-competitive market, a natural-monopoly firm, when left to its own, tends to limit its output to a point where its marginal cost equals its marginal revenue but charge a much higher price than what would have prevailed when there is a highly-competitive market.In a highly-competitive market, the output tends to settle at a point where marginal cost equals marginal revenue, which also equals its price and where the unit cost of production is the lowest possible because of competition. When the price is greater than unit cost and profits are high, more firms will come to compete in the market and drive down the price back to where it is just equal to unit cost. When the price is below unit cost, the resulting losses will drive out some of the firm from the market, thus raising the price back again to where it is just equal to the unit cost of producing the product concerned.
Because a natural monopoly, like any firm in an imperfect market, charges a price way above the equality of marginal cost and marginal revenue, it also produces at a certain level of output that is less than what would have prevailed when the market is highly competitive. These twin evils (higher price than necessary and lower output than possible), which arise from the presence of a monopoly, make for a very strong case for government intervention.
For the good of the public, the government can do three things when the presence of a natural monopoly is unavoidable such in the power sector. One is to create and operate a monopoly firm or take over the operation of an existing one, resulting in government?s being actually in the business of producing or supplying electricity to the public. Another is regulating the operation of the monopoly firm in terms of what level of prices it can charge and profits it can make, as what is being done currently to all power distribution firms operating in the provinces and cities in the country. Finally, the government can simply discourage firms from increasing the extent of their monopolization through legislations, such as limiting the extent of their franchise areas and licensing other firms to operate in the same or nearby area.
The GSIS-led government move to take control of Meralco, which supplies power in Metro Manila, is a case of the first type of government intervention. It remains to be seen, however, if it is the wiser move, given what we know of how government-owned and -controlled corporations (GOCCs) fare in the country, not to mention the impact of such a move on the investment climate, particularly with respect to foreign investors who demand consistent and more business-friendly government policies to be in place before they make the decision to invest.
So much has been said about the supposed abuses of Meralco and how it defrauds the public by jacking up their rates beyond what is necessary, collecting deposits for meters, and paying their executives fat salaries in addition to numerous perks. Such things may be true but may also be untrue. For lack of access to inside information that not even all Meralco
insiders know, how could we in the outside really know which is which? We can only conjecture, as what is being done now by GSIS? Winston Garcia, who, while in the Meralco board, is not actually privy to all that is going on at Meralco. But if we also listen from the people out of Meralco?s inner sanctum, they also appear to be innocent of the charges.
From the Senate, on the other hand, we also hear people say that we got all this trouble of high power rates in the country because government regulators approved them. This may or may not be true. Which leads me to ask the question: Whose interest is it that government regulators, like the Energy Regulatory Commission in the case of the power sector, is trying to serve? US economist George Stigler says that sometimes regulators end up serving the industry interest, not the public interest. I can only agree.
How does the ERC, for example, determine the price that Meralco will charge to its customers and the level of profit that it will make? Won?t the lack of information on the part of the ERC people put them at a disadvantaged position in making their decisions on Meralco?s petition for rate increases? And, by the self-interest principle, won?t Meralco owners who are actually in control of Meralco management, also tend to hide information, overstate costs or understate revenues to get the highest profit possible?
