Question

When is a producer's self-interest aligned with the social interest? This is one of the major questions addressed by economic theory. The previous chapter explored the behavior of profit – hungry producers in a perfectly competitive market. That model implied that greedy producers whose sole interest is profit will unwittingly and quite without benevolence, serve the social interest. The theory of monopoly behavior immediately follows the analysis of perfect competition in order to emphasize, by way of contrast, the destructive consequences of greed unbridled by the discipline of competition.

Imagine a society swept by a debilitating, contagious disease that torments its victims for decades before finally killing them. This society's only pharmaceutical firm develops a drug that will cure the disease. The firm wants to maximize its profit. The marginal cost of producing the drug is low, $1.00 per dose.

What price is the firm likely to set?

Suppose some disease sufferers are wealthy and others are poor. All can afford $1.00 per dose but the poor cannot afford to pay more than $1.00 per dose. Is the monopoly operating in the social interest?

Imagine that many new firms enter the market by discovering and producing drugs that cure the same disease. How does this difference change the original situation?

Answer 1