Question

(a) Explain using diagrams how monopoly power can impose costs on society. (b) If the gains to producers from monopoly power could be redistributed to consumers, would the social 5. cost of monopoly power be eliminated? Explain. (c) What can the government do to reduce the social costs of monopoly?

Answer 1

Solution 5A

Monopoly players are not price takers and are price setters. Hence they charge prices for goods which cannot be supplied or produced by other players in terms of quality and quantity. Hence consumers tend to purchase goods even at higher cost due to no other options and consequently leads to under consumption and market failure hence social cost is imposed .

Solution 5B

If gains ontained to monopoly player is redistributed to consumer in form of cashback or discount or near marginal cost, this can lead to increase in consumption and positive market reaction and hence social cost is eliminated ro certain extent  

Solution 5C

Government can strictly set regulations which removes any artificial setting of quantity or adjust the average price if product be fixed to marginal cost. The government may make entry barriers easier so that maximum firms enter market causing drop in monopoly prices and hence reduce social cost of monopoly .