Question

postings should be a minimum of 30 words. After reading chapters 12 and 21, carefully discuss the following main themes: Why are monopolies generally considered a bad thing from an efficiency standpoint? Are their instances where monopoly is a necessary market arrangement? What is the socially optimal price for a regulated monopoly? How does the fair return price differ from the socially optimal price?Philosophically, do you believe a company that is producing a non-essential good should be prevented from achieving monopoly status if they abide by the law? Why or why not?

Answer 1

Because a monopoly equates its marginal cost to its marginal revenue, it charges a price (on the demand curve) higher than the competitive price. This results in a deadweight loss.and generates less surplus than a competitive market. From  the view point of efficiency, monopolies are thus less efficient than competitive markets.

Under some circumstances, monopolies are not only preferred but are a better alternative to other market structures. Natural monopolies exist when market situations are such that there cannot be more than one efficient provider of a good. Competition in these cases, actually increase costs and prices. For example, railways. For natural monoplies, the LRAC declines continuously as output expands. In some industries high fixed costs/investments, possession of unique raw materials/technology act as natural barriers to entry. In such cases too, monopoly structure is a natural option.

For a regulated monopoly, the socially optimal price is where allocative effiency is achieved, i.e. P=MC. Sometimes this price is so low that firm cannot even cover its average total costs and runs into losses. Therefore regulated monopolies generally require some government subsidies.

The fair return price is such that P=ATC, so that a monopoly can at least cover its costs and realizes only a normal profit.

I do believe that a company that is producing a non-essential good should be prevented from achieving monopoly status even if they abide by the law because monopoly market structures are inefficient and welfare reducing from the point of view of the consumer. Competition among firms should be encouraged to maximize efficiency and consumer gains so that all the gains from trade can be realized.