Tuesday, 2 July 2013

Natural Monopoly

Water supply- NATURAL MONOPOLY
         The Selangor Government will have to pay RM17 million in compensation to Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) when it starts giving free water in June, 2007.  The compensation was based on the 20 cubic metres of free water or RM11.40 monthly to be given to 1.5 million consumers in the state. Therefore, the people need not pay RM11.40 in water bills. We can say that Syarikat Bekalan Air Selangor Sdn. Bhd. (SYABAS) is one of the monopoly firms in Malaysia because it is the only firm which supply water to the resident in Selangor.

           Since supply of water requires high fixed or start-up costs to operate the business, so it is known as a market structure called natural monopoly.  Natural monopolies are common in markets for ‘essential services’ that require an expensive infrastructure to deliver the good or service, such as in the cases of water supply, electricity, and gas, and other industries known as public utilities. Government tend to nationalise or regulate these firms because there is the potential to utilize monopoly power and to ensure that consumers get a fair deal. Therefore, the government give compensation to SYABAS to ensure that people are not suffer for the water bills. In this way, society can benefit from having natural monopolies because having multiple firms operating in such an industry is economically inefficient.

written by: Yoon Jing Wei 0315416

7 comments:

  1. Can you please explain, will SYABAS experience a loss if the government do not give them compensation?

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    1. Perhaps. This is because the price that set by SYABAS which is known as regulated price or socially optimal price may be so low that the average total costs are not covered.

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  2. Beside SYABAS, is TNB considered monopoly?

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    1. Yes, because it is the only firm that provide electricity in Malaysia. TNB is also considered as natural monopoly, because it is one of the public utilities. Most of the public utilities is considered as natural monopoly. Hope you will understand. :)

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  3. Is there any other way apart from giving compensation to SYABAS to cover the average total cost?

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    1. Yes, another way is to condone price discrimination which allow the monopoly to charge some customers prices above regulated price and hope that the additional revenue that the monopoly gains from price discrimination will be enough to permit it to break even. In addition, the government can regulated price that is high enough for monopolist to break even.

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