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Electric Industry - Essay Example

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This has left many players in the industry act as natural monopolies. A natural monopoly occurs when average costs persistently fall as the firm…
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Electric Industry National policy in many countries including United s for many years has failed to foster competition in wholesale power markets. This has left many players in the industry act as natural monopolies. A natural monopoly occurs when average costs persistently fall as the firm gets larger and larger. This has left one wonder whether the electric industry is too complex for competition to work. Nonetheless, one can argue that the industry is not as complex as it may seem. Many of the monopolies are controllable since they are caused by the existing system by the governments.
The competition in the electricity industry is not as complex as it seems. What has happened is players have always believed that one electricity firm can supply the entire demand at a considerably lower cost than multiple electric firms serving the appropriate market. From this basis they conclude that electric transmission and distribution must always be to be regulated, since in the absence of energy regulation, transmission and effective electricity distribution owners may not face enough competition in the industry to ensure prices are kept low to consumers and to attain economic efficiency in electricity transmitting and distributing. This is, however, the case with many other natural monopolies in the industry. Natural monopolies exists where the largest supplier in an electricity industry, often also the first supplier in a market, has a significant cost advantage over other real or potential competitors; this has always tended to be the case making competition in electricity industry seem complex. The same is the case in the same industry where fixed costs prevail, generating economies of scale that are huge in relation to the market size, as is the case in water and electricity services. This has led to complexity as these electricity firms take advantage of economies of scale and causes problems of bureaucracy and inefficiency. As with all monopolies in electricity market, monopolies who have gained their position on natural monopoly effects could be involved in behavior that abuses their market position, which always leads to calls from various consumers for government regulation.
Encouraging competition in the electricity industry is not as complex but requires massive investment by private sector investment as the initial capital is many times massive thus discouraging players and this minimized competition. This would especially start with deregulation that normally lacks monopoly, and these go a long way in encouraging new entrants in the electricity industry. This would encourage alternative energy sources and encourage competition due to availability substitutes. This has been the key difference between markets of the electricity industry, and competitive market is product differentiation. Unlike in a perfectly competitive market where services are perfect substitutes for each other, the regulation in the electricity industry has minimized substitute possibilities.
As a conclusion, although a lot can point to a fact that the electric industry is too complicated for competition to work this is not the actual reality. Various regulations and barriers to entry have for years caused players to engage in natural monopolies.
Work cited
Posner, Richard A. Natural Monopoly and Its Regulation. Washington: Cato Institute, 1999. Internet resource. Read More
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