Question

Q2- Why does a monopoly result in a loss of efficiency compared to a perfect competition
framework? Can you think of a government policy which would result in a loss of efficiency?

Answer 1

page-1 A monopoly exists when a specific enterprull is only supplier of a particular commodity. Monopolies ! little to no Competition when preoducing a good ore ve A monopoly is a buineu entity that has eignificant marvel powert. Monopolettic competition characterizes an industry in which many firemu offer preoducts or lerevices that are limolare, but not perfect rubstitutes. Barriers to entry and exit in a monopolistic Competitive industry are low, and the decisions of any one firem do not directly affect thole of itx Competitors. Monopolistic Competition is closely related to the busines strategy of breand differentiation. In a monopoly, the firem auall net a specific price for a good that is avawlable to all consumers. The quantity of the good will be leu and the preace will be higher The monopoly prcing Creates a deadweight lou became the firem foregous transactions with the Consumers. The dead weight lou us the potential gain that did not go to the produce one the Concelmere - The dead weight loss became the foregoll trean action with the consumers. As a result of the deadweight loll, the Combined earphel of the monopoly and the contumers in ley than that obtained by Conument on a competitive manuef. The frerem in allocatively and productively inefficient in both the long & shored rean. MC • costs & Revenue output

Page 2 The government's role in the economy can he brown down into two basic neft of functions. It attempts to preomote economic stability and growth, and it attempts to regulate and contreal the economy. It's tool fore promoting economy stability and growth and fix cal policy. The federal government regulates and Contreals the economy threough numerous Laws affecting economic activity. There range from Laws enforceing preovate preoperty rights to Lawe promoting Competition among bwineves. The governmental policies upon the efficieny of the economy, including both treaditional governmental areas and the vaut and growing share of government al programs aiming to redistribute in come. A preopored principle of legitimacy states that every action est by a legistature repreelent a cocial Judgment that rociety is better off that action. Thus all governmental policies are by hypotherie utility increasing fore the nation. Ang Cort of a rediftribution of income are ten than the benifits. National output and presently meauned can and wualy will fall when a new redistribution of income il instituted, Becaun it is colty to redistributed income. In this friend in governme policy likely to be reverted, perhaps by a genered morrement towards deregulation. The Authore is ans were to this question is calculated to restore the claim that economice is the diemal science.