Question

A certain town in the Midwest obtains all of its electricity from one​ company, Northstar Electric. Although the company is a​ monopoly, it is owned by the citizens of the​ town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the​ citizens, it makes economic sense to charge a monopoly price for electricity. True or​ false? Explain.

Answer 1

The claim is entirely false. Even though the profits are redistributed back to the citizens, monopoly production will lead a lower output at a higher price compared to the competitive production. In other words, there will be a dead-weight loss since a smaller amount of the service is produced and sold at a higher price. Thus, it does not make sense to charge a monopoly price.