There are many
observable applications of economics into our daily life. There is always the
odd exception where things move in the exact opposite of economic theory, such
as stock market crashes, which is due to human overreaction, or other irregularities
encompassing the complex nature of human rational behavior. However, there are
still many prime examples in the market which allow us to fully apply learnt
economic concepts.
Part 1: Is TNB a
Monopoly?
One of the most blatant and
obvious presences in Malaysia, TNB is the main Malaysian energy provider, and
controls most of the power plants in and around the region. The firm itself is
the industry, as there are no close substitutes for power generation, unless
one wishes to procure and use an electric generator at home, and there are
barriers to entry for fledgling companies who wish to start up against TNB. It
is a form of natural monopoly. Due to the nature of TNB being the only producer
in Malaysia, all consumers have no alternatives and TNB instead of being a
price taker is able to be a price maker, implying supernormal profits are
available for the taking [1].
Figure 1.1
The above graph shows
an example of how a natural monopoly exists. As the ATC (Average total cost)
continues to decline, the firm has ‘natural monopoly’. Should the production of electricity be
divided among several different firms, like in the above case, should TNB have
to split the quantity produced with say, ABC plc, the production point would be
at B instead of the optimal point of A. The overall demand of the market would
be met, but at a much steeper premium compared to if TNB had a natural monopoly
over the whole market. This is because it is cheaper for one firm to dominate
an industry as building up a network could result in higher costs to the firm,
and result in even higher exorbitant jacked-up prices. This is the reasoning as
to why TNB has exclusive rights to power plants from the government and is thus
able to produce electricity at a lower cost.
In the case of TNB,
however, a monopoly might not definitely be a good thing. TNB had originally
been a government statutory body known as the National Electricity Board [2].
Due to its corporatization in the early 1990s because of a near nation-wide
blackout, and its subsequent reliance on independent power producers (IPPs),
there have numerous disproportionate losses it has to incur.
A substantial portion
of the electricity generated comes from natural gas, due to its abundance in
Malaysia. However, a large amount of subsidizing is done by Petronas [3],
making them incur more losses, and having more profits go to the IPPs. Having a
single firm purchase fuel from IPPs will lead to higher costs and price hikes
will eventually become inevitable and the most recent revision in 2011 was to
rectify the tariff for the price increase for natural gas from RM10.70/mmBTU to
RM13.70/mmBTU [4]. TNB itself
is also a company with shareholders, with the major one being the government,
implying that the shareholders in TNB are the citizens themselves.
Due to the inelastic nature
of a necessity, a large increase in price will only lead to a low drop in the
quantity demanded, which is why the government had imposed tariff limits to
prevent overexploitation of the established monopoly stated above.
Figure
1.2
The nature of an
inelastic demand states a large change in price will only be reflected by a low
amount of change in the quantity demanded, showing a low responsiveness of the
quantity demanded to the pricing of the utility measured. Since electricity
supply is a necessity, homeowners or enterprises do not have a choice in
accepting the new tariffs.
However, natural
monopolies are only sustainable for relatively small markets, and should the
market continue to expand, and the demand for electric supply exceeds the
continued output from TNB, more firms will have to come into play to offset the
demand, such as how the UK has already established numerous firms, creating a
perfect competition market between those companies. There have been rumors of
an oligopoly forming between the bigger companies, but no concrete and
substantial evidence has been found to convict the management of any of the
companies.
Part 2: Perfect
Competition in UK
In a market with perfect
competition, there are many buyers and sellers. There is also no big firm
compared to the market as a whole. The said firms all sell the same goods and
are price takers, not makers. These firms will be unable to determine at what
price they can sell their goods, and can only accept the price dictated by the
equilibrium between demand and supply [5]. UK electric and gas
suppliers includes firms such as British Gas, npower, EDF energy, and the like [6].
There is a myriad of choices for consumers to pick from. These companies will
have to compete with each other for creating a stable supply network.
Figure
1.3
The demand for a
product is perfectly elastic when marginal revenue equals average revenue,
resulting in a perfectly horizontal line. The industry equilibrium dictates at
what price the firms will be able to sell their products, which in this case is
electricity. The firm demand is perfectly elastic due to the fact that the
product of any one firm can be easily substituted by another firm.
The firms stated above
will then have to produce electricity where they have maximum profit, which is
either where they have the highest revenue less cost amount, or where marginal
revenue is equal to marginal cost.
Figure
1.4
Figure
1.4 shows total cost and total revenue of a firm currently in perfect
competition.The areas before point A and after point C
indicate production areas where the firm will suffer an economic loss. The
green area between the aforementioned 2 points which includes point B show the
production zones where the firm will be able to make an economic profit. Point
B is the quantity that a company with a total revenue and total cost as in
Figure 1.4 should produce in order to maximize its profit, as it has the
largest difference between total revenue and total cost. The firms cannot have
output levels that are either too low or too high as they will be unable to
either cover their fixed costs or cover the rising costs due to rapidly
diminishing returns per output. The optimal point is also where marginal
revenue is equal to marginal costs, as every unit extra or less of marginal
revenue means more cost is required to generate the income than the income
itself.
In a market with perfect
competition, it is not possible to obtain supernormal profits, as displayed by
electric industry in the UK. They are only able to attain normal profits in the
long run, as firms are free to enter and exit the industry, and new firms will
enter a profit-making industry and leave a loss-making industry [5].
When firms are unable to sustain their operations in a certain industry, they
are free to leave it, thus allowing a lowered production from each company to
rise, and vice versa.
There are also several
differing factors between a monopoly and perfect competition. One such factor
is the deadweight loss incurred in a monopolized market.
In a monopoly, the
firm maximizes profit by producing where marginal cost equates marginal
revenue. A firm in perfect competition has to produce where price equates
marginal cost and marginal revenue, as it is a price taker, and is unable to
manipulate the market. They key difference here is that in monopolized markets,
the price of the goods sold will always be higher than the marginal cost and
marginal revenue.
Under normal
circumstances, there is a consumer and producer surplus, the former being the
monetary gain obtained by the consumers being able to purchase a good at a
price lower than they are willing to pay. The latter shows that producers will
actually produce for a price at below the equilibrium level, but the marginal
cost increases for each subsequent unit of goods.
When there is a
monopoly, and less quantity than the equilibrium is produced, a deadweight
social loss is incurred. Then, as the
good is sold at below the socially efficient level, and not all consumers that
will value the good itself more than how much it is, will buy it [7].
Monopolies will fail
to allocate their resources efficiently enough to satisfy the overall market.
They will also produce less than the socially desirable level of output, and
they will also charge a price higher than their actual marginal cost.
Hence, it is vital for
government intervention in the regulation of monopolies. One such Act is the
Competition Act (Act 712) [8], which prevents the abuse of dominant
position (ADP), which prohibits any abuse by enterprises occupying a dominant
position in the market, such as in terms of price discrimination, excessive
pricing, and predatory pricing. Should the government decide to implement a
perfect competition market for the running of the electric industry in
Malaysia, there are currently many laws under which the welfare of the citizens
of Malaysia will be safeguarded.
References:
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