Question

Why do monopolies provide public utilities such as water and electricity? Briefly, discuss.

Answer 1

The monopolies provide public utilities such as water and electricity because they can provide it at a lower average total cost than if there were two firms in the market.

If there were more firms in the market, then the average total cost of all the firms will increase in which case, the cost of production increases which is passed to the consumers in the form of an increase in the price level.

If only a monopoly is providing the service, then its average total cost keeps decreasing in which case, the cost of production decreases which generates economies of scale and the monopoly provides the services at lower prices to the consumers.