Question

Microeconomics

Suppose that a monopoly industry produces less output than a similar competitive industry. Discuss why this may be considered socially undesirable. Is this because it is always socially beneficial to produce more of some product? If competitive firms earn zero economic profits, explain why anyone would invest money in them. (Hint: What is the role of the opportunity cost of capital in economic profit?)

Answer 1

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1. Producing less output by monopolist is undesirable because monopolist works inefficiently due to presence of market power with it and do not focus much on technical and allocative efficiency. Yes, it is always socially beneficial to produce more of a product if it is a good or good service as it fulfills the objective of maximum satisfaction of wants.
2. If competitive firms earn zero economic profits, people would invest in them because atleast fixed cost is covered. This situation is called normal profit earning. In this, operational cost and some of fixed cost is also covered which implies that business can become free of fixed investment over time. When we talk about opportunity cost, it is present in every type of cost in economics as we can see that fixed capital also contains opportunity cost which gets covered in even in competition.