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A Note on Economies of Scale and Natural Monopoly in the Distribution of Public Utility Services

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  • Richard Schmalensee

Abstract

This note presents a simple model of the determination of the cost of distributing a public utility service to customers spread over a single urban area. Total distribution cost depends on the cost of transmitting services and on the spatial pattern of demand. Everywhere decreasing average cost of transmissions is found to be sufficient but not necessary for natural monopoly. With decreasing average transmission cost, marginal cost pricing (appropriately defined) does not cover total distribution cost, but average distribution cost need not fall with increases in total demand in the area.

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  • Richard Schmalensee, 1978. "A Note on Economies of Scale and Natural Monopoly in the Distribution of Public Utility Services," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 270-276, Spring.
    • Handle: RePEc:rje:bellje:v:9:y:1978:i:spring:p:270-276
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    Cited by:

    1. Daniel Danau & Annalisa Vinella, 2020. "A note on optimal contracting with public ex post information under limited liability," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(1), pages 47-74, March.
    2. Catherine J. Morrison Paul, 2003. "Cost Economies: A Driving Force for Consolidation and Concentration?," Southern Economic Journal, John Wiley & Sons, vol. 70(1), pages 110-127, July.
    3. Won, Gu-Hwan, 2007. "Electric power industry restructuring and ROE: The case of Korea Electric Power Corporation," Energy Policy, Elsevier, vol. 35(10), pages 5080-5090, October.
    4. Torres, Marcelo & Morrison Paul, Catherine J., 2006. "Driving forces for consolidation or fragmentation of the US water utility industry: A cost function approach with endogenous output," Journal of Urban Economics, Elsevier, vol. 59(1), pages 104-120, January.

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