Question

An years past, firms around the world have secretly engaged in collusive agreements to restrain production and push prices above competitive levels.

Evidence compiled by government officials investigating such agreements has revealed that conspiring firms often utilize similar methods of establishing and enforcing collusive restraints of trade. Most agreements, for instance, assign to each firm an allowed market share, a permitted region of operations, or an approved set of customers. In addition, participating firms commonly are required to exchange sales information so that they can monitor adherence to their agreements to restrain trade. In this chapter, you will learn why firms that typically utilize these techniques to formulate and maintain collusive agreements engage in secret conspiracies: Such agreements are illegal under U.S. antitrust laws.

Recognize the practical difficulties in regulating the prices charged by natural monopolies

Short answer

A training reflection that summarises what data, competencies, and perspectives pupils should be able to demonstrate after gathering input.

Step-by-step solution

Given information 

If a specific company can serve a market at a lower cost than any fusion of multiple or more entities, that trade is considered to be an excellent dominance.

Explanation 

The public utilizes such as the electric utilities are of the nature of natural monopolies.

They utilize a large network of wires to transmit electricity to their customers and large set up to generate thermal power or hydro power, as the case may be.

Owing to large operational cost that involves cost of generating and transmitting electricity such companies experience a high level of average cost initially.

The average costs would fall and further fall in long-run only when there is increasingly higher production of electricity. That means, such companies would be able to reap the benefits of economies of scale only when they produce increasingly higher levels of output.

Explanation 

Given that individuals and firms have started relying on alternative sources of electricity by generating them using non-traditional distributed power generation technique such as by installing solar panels or using wind turbine or using energy-producing biogas, the demand for electricity supplied by electric utilities is increasingly falling down. As the result of which the electric utilities feel compelled to reduce their supply of electricity. With lower production, the electric utilities would be compelled to operate at higher long-run average cost and experience diseconomies of scale. Internal diseconomies would arise as there is large number of resources in place to take care of small level of production. There will be issues of co-ordination. There will be higher numbers of assistants and supervisors than required. The management structure would become cumbersome and overall efficiency of the management would fall.

The external diseconomies would arise due to expansion of the industry on one hand and on the other hand, due to rise in factor prices as electric utilities faces competition with the producers of solar panels, biogas plant and wind turbines.