Suppose that there is only one provider of a service in a state. Because this provider experiences economies of scale, the government does not want to break into smaller pieces, but it does want the provider to supply the efficient quantity.

Which of the following policy options might most effectively enable the government to achieve its objectives in this situation?

a. Use the law to increase competition

b. Turn the company into a public enterprise.

c. Regulate the pricing behavior

d. Do nothing at all.

Turn the company into a public enterprise.

Explanation:

When a natural monopoly, such as an electric utility, is forced to sell itself to a public institution, the private monopoly will become a public enterprise. Such a policy option, which might be chosen by a government that views electricity as a public good, is generally the European approach to providing utilities. A potential drawback of this approach is that government managers may have little incentive to keep costs down.

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