Question

Under what circumstances would a monopolistic firm be economically more efficient than a group of small, competitive firms? If there are such monopolies, what are the drawbacks and how could they be corrected? You may give an example to make your points more clear.

Answer 1

A large monopolistic firm will be more efficient than several small firms in the market when they are achieving an economies of scale. For example, an electricity distribution company can be more efficient of their is only one firm in the market. they have to get distribution lines to provide the electricity here many small firm will make the job more difficult.

The draw back they have is as a monopoly the firm will produce less than fully efficient output in the market and at a higher price. To get that right the government can set a price ceiling at the point where the average total cost curve meets the average revenue curve or the demand curve.