Question

Name three sources of inefficiency of a monopoly other than the allocative inefficiency of part (a) and for each write one to two sentences explaining them.

Answer 1

The three sources of inefficiency of a monopoly are, productive inefficiency, excess capacity, deadweight loss.

Productive inefficient - A monopoly firm enjoys economies of scale but it is productively inefficient, because it does not produce at the minimum average cost level.

Excess capacity - A monopolist produces in large scale but as the monopolist does not produce at the minimum point of its average total cost, it always produces the output which is less than the potential level of output.

Deadweight loss - The deadweight loss arises in monopoly because it produces lower output and charges higher price than the perfectly competitive market. The free trade allows an economy to achieve the maximum social welfare but in monopoly the social welfare decreases that results in deadweight loss.

________________________________________________________________________