Question

Local cable television companies are sometimes granted monopoly rights to service a particular territory of a metropolitan area. The companies typically pay special taxes and licensing fees to local municipalities. Why might a municipality give monopoly rights to a cable company?

Answer 1

A municipality might take high taxes and licensing fee and in exchange would give monopoly rights to a single company providing cable services considering large economy of scale and efficiency.

Because there is only one company providing cable services in the area, the average cost of production would reduce as their output shows an increase. This is a characteristic of natural monopoly.

The other reason from the side of municipality is that if only one firm gives the cable services in the area, then it becomes easier for them to have a control over them. One large firm is easier to control than market divided by smaller firms. This is one benefit, along with that they get paid extra dues and taxes for the city so that the company can work in the regulated area. This way the municipality can raise their revenue for city. Hence, both the parties benefit with such an agreement.