Question

Explain the economic fundamentals necessary for a monopoly to charge a higher price than if the industry was perfectly competitive, but for the economy to still achieve a higher level of total surplus under monopoly. Give one historical example of this. How would you argue for not breaking up this monopoly (or for an antitrust system that in general avoids breaking up similar monopolies to a general population that feels more deeply connected to policies that deliver high levels of consumer as opposed to producer surplus)?

Answer 1

There many firm in the market in perfect competion market. Entry and exit are free. A firm does not have any control over supply of the good. It means an individual firm cannot affect the price. On the other hand a monopolist is a single producer in the market. It has total control over market supply. Entry and exit are banned in the monopoly market. Thus monopolist supply less in the market. It charges higher price for its good than price for the same good in perfect competion. Total surplus will be highest in the perfect competition market. A monopolist charges higher price which reduce consumer surplus in the market. A monopolist can charge higher price for inelastic demand.