Question

Can monopolies be useful in presence of negative externalities? Explain clearly!

Answer 1

Monopolies produce the output at a level when marginal revenue equals marginal cost. This output level is less than the output, produced by the perfectly competitive firm. As a result, a monopoly firm causing negative externality already produces less and leans towards the socially optimal equilibrium. In this scenario, the government requires intervention of smaller size to cause the monopolist to produce output, where the marginal social cost = marginal social revenue.
So, monopoly helps to control the negative externality. To make higher prices, the output produced are already at a lower level. Therefore, the impact of negative externality is already limited.