Question

Suppose that the government is concerned that an electric utility company is taking advantage of consumers with unfair pricing policies. The government views electricity as a public good that is likely to be produced inefficiently by the private sector. Which of the following policy options might most effectively enable the government to achieve its objectives in this situation?

a. Regulate the pricing behavior.
b. Turn the company into a public enterprise.
c. Use the law to increase competition.
d. Do nothing at all.

Answer 1

Answer: Turn the company into a public enterprise.

Explanation: When a natural monopoly, such as an electric utility, is forced to sell itself to a public institution, the private monopoly will become a public enterprise. Such a policy option, which might be chosen by a government that views electricity as a public good, is generally the European approach to providing utilities. A potential drawback of this approach is that government managers may have little incentive to keep costs down.