Question

The government often grant monopoly power to private firms through patents. How does this effect consumers? What is the justification for granting this type of monopoly power?

Answer 1

When the government gives the patent to a product it gives them the monopoly power. The monopoly firm charges a higher price for their product and that would be above the marginal cost of the product. In this case the consumers are worse off and there is a decrease in the consumer surplus. Due to the higher prices the weaker sections of the society cannot be able to afford the good or service. The people with higher purchasing only would get the product that creates inefficiency in the market. The government grants the patents to encourage inventions in the economy, without the patents any one can copy the products and this would lead to lack of incentive for invention so the government must give the patents.