Question

First, share your thoughts on the common belief that monopoly is harmful to our economy. Do you think monopolies can be justified despite market inefficiencies?

Answer 1

A monopoly is considered to be a social evil. The existence of a monopoly market creates some adverse consequences in an economy. But a monopoly market has several favorable effects in the economy. Some of the adverse and favorable situations created by the existence of monopoly market are listed below.

Disadvantages of monopoly.

1. Exploitation of consumers.

A monopolist charges a price which is higher than the marginal cost. Under a competitive market the firms charge a price which is equal to marginal cost and willingness to pay of the consumers (P=MC=MR=AR). But the monopolist charge a price which is higher than MC. Thus the consumers are overexploited under monopoly. Again the monopolist practice price discrimination and extract revenue that each consumer is willing to pay.

2. Less incentive to cost reduction.

Since the monopolist face no competition from the rival firms, there is no incentive on the part of the monopolist to reduce the cost of production. Thus each product is produced at a higher cost and the existence of monopoly diminishes the social welfare.

3. Absence of dynamic efficiency.

As the monopolist has less incentive to cost reduction, they invest less in research and development. Thus new inventions and innovations are comparatively low under monopoly. Thus the economy lacks dynamic efficiency.

4. Low consumer surplus.

A competitive market ensures maximum consumer surplus. But a monopolist charges a higher price which is higher than the competitive equilibrium price. Thus the consumer’s surplus and social welfare is low under monopoly.

5. Inefficient production.

The monopolist usually produces at the highest point of the ATC by leaving excess capacity. Thus the production is inefficient under monopoly.

6. Less choice to the consumers.

Under the monopoly, the consumers have no option to choose the product since the entire market is controlled by a single seller.

7. The monopolist by its economic power may corrupt the politicians and influence to make laws in his favour.

Disadvantages.

Despite the productive and allocative inefficiencies a monopoly market has several favourable effects.

1. Monopoly benefits weaker sections.

Under third degree price discrimination the monopolist divide the consumers in to groups. It charges a high price from the rich and lower price from the weak like old, disabled and children.

2. Major source of revenue to the government.

The monopolist accumulates higher profit. Thus the government can get adequate revenue by taxing the monopoly firms.

3. Increased investment.

The huge profit of the monopolist may reinvest in the economy which increase the growth rate of the economy.

4. Economies of scale.

The government makes the monopoly firm more efficient by moving it to the lowest point of the ATC through the average cost pricing. Thus the benefit of economies of scale can be passed to the consumers in the form of lower price.