Question

Consider a market in which a firm has monopoly power. Suppose in addition that the firm’s...

Consider a market in which a firm has monopoly power. Suppose in addition that the
firm’s production process produces either a positive or a negative externality. If the monopolist
produces its private optimum level of output, does the externality necessarily lead to a greater
misallocation (deadweight loss) of resources regardless of whether it is a positive or a negative
externality? Explain

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Answer #1

if firm's production process produces a positive externality then monopoly produce that level of output at which marginal revenue= marginal cost and there will be under production by monopoly firm because social optimum production equate marginal revenue with social marginal benefit. social margial benefit is a sum of price and marginal external benefit.. so, in the case of posivite externality there will be under production by firm.

if firm's production process produces a negative externality then monopoly produce that level of output at which marginal revenue= marginal cost and there will be over production by monopoly firm because social optimum production equate marginal revenue with social marginal cost. social margial cost is a sum of price and marginal external cost.. so, in the case of negative externality there will be over production by firm

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