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If a monopoly generally brings a loss of economic efficiency and consumer surplus, why would a...

If a monopoly generally brings a loss of economic efficiency and consumer surplus, why would a local government give only one utility company (such as a cable television company) a license to enter its market? Should local governments continue this practice?

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Answer #1

This is perhaps because only one large utility is able to supply to the entire market. Such a utility must have economies of scale which means that its cost of production should continue to decrease as more production is done. This happens only when there is one large natural monopoly. Even though it brings economic inefficiency and results in larger losses for consumer surplus, it can be regulated by the local government so that while it maybe breaking even it will continue to cater to the market. if instead the market is allowed for competition no other firm will survive in the long run because of the lack of economies of scale. Local government should continue this practice but they must use fair price policy so that no economic profit can be generated by such utility.

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