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Why monopolies are often regarded as being inefficient

A model used to identify equilibrium in Keynesian economics based on injections investment, I and leakages saving, S for the two basic sectors household and business. Equilibrium is achieved at the intersection of the saving line, S, and the investment line, I. A monopoly generally produces less output and chargers a higher price than would be the case for perfect competition.

  • Therefore, a competitive industry operates at a point where price equals marginal cost;
  • This is a good thing;
  • Breaking up the monopoly Breaking up the monopoly into several smaller firms;
  • The inequality between price and marginal cost is what makes monopoly inefficient;
  • Monopoly does not efficiently allocate resources;
  • Monopoly does not efficiently allocate resources.

In particular, the price charged by a monopoly is higher than the marginal cost of production, which violates the efficiency condition that price equals marginal cost. Monopoly is inefficient because it has market control and faces a negatively-sloped demand curve.

Monopoly does not efficiently allocate resources.

Monopoly power

In fact, monopoly if left unregulated is generally considered the most inefficient of the four market structure s. The reason for this inefficiency is found with market control.

As the only seller in the market, the negatively-sloped market demand curve is THE demand curve facing the monopoly. If buyers want to buy, they must buy from the monopoly. The negative slope of the demand curve means that the price charged by the monopoly is greater than marginal revenue.

As a profit-maximizing firm that equates marginal revenue with marginal costthe price charged by monopoly is greater than marginal cost. The inequality between price and marginal cost is what makes monopoly inefficient. Profit Maximization Inefficiency Consider the production and sale of Amblathan-Plus, the only cure for the deadly but hypothetical foot ailment known as amblathanitis.

This drug is produced by the noted monopoly firm, Feet-First Pharmaceutical. A typical profit-maximizing output determination using the marginal revenue and marginal cost approach is presented in this diagram.

Feet-First Pharmaceutical maximizes profit by producing output that equates marginal revenue and marginal cost, which is 6 ounces of Amblathan-Plus in this example. This profit-maximizing production is not efficient. This is a good thing.

Inefficiency of Monopoly | Markets

It is so good, that society should do more. However, the monopoly is not letting this happen. Feet-First Pharmaceutical is not devoting as many resources to the production of Amblathan-Plus as society would like.

  1. That is, the usual monopoly solution pm, qm is Pareto-ineflicient. As the only seller in the market, the negatively-sloped market demand curve is THE demand curve facing the monopoly.
  2. De-regulation In those cases where a monopolist is already State controlled, such as the Post Office, it may be necessary to engage in deregulation to enable it to become more efficient. High prices Monopolies can exploit their position and charge high prices, because consumers have no alternative.
  3. Employment is largely determined by output — the more output a firm produces the more labour it will require. The benefits of monopoly Monopolies can provide certain benefits, including.
  4. The benefits of monopoly Monopolies can provide certain benefits, including.

An Efficient Alternative The degree of monopoly inefficiency can be illustrated with a comparison to perfect competition. Such a comparison is easily accomplished by clicking the [Perfect Competition] button.

Monopoly power

A primary use of perfect competition is to provide a benchmark for the comparison with other market structures, such as monopoly.

A comparison between monopoly and perfect competition indicates: Monopoly produces less output than perfect competition.

In this example, monopoly produces 6 ounces of Amblathan-Plus compared to about 7.

  1. When a firm has exclusive ownership or use of a scarce resource, such as British Telecom who owns the telephone cabling running into the majority of UK homes and businesses. However, there would be little incentive to do this and the savings made might be used to increase profits or raise barriers to entry for future rivals.
  2. This means that it can produce at low cost and pass these savings on to the consumer.
  3. Consumer surplus is the extra net private benefit derived by consumers when the price they pay is less than what they would be prepared to pay.
  4. Feet-First Pharmaceutical maximizes profit by producing output that equates marginal revenue and marginal cost, which is 6 ounces of Amblathan-Plus in this example.
  5. A comparison between monopoly and perfect competition indicates.

The Feet-First Pharmaceutical monopoly does not allocate enough resources to the production of Amblathan-Plus. Monopoly charges a higher price than perfect competition. The Feet-First Pharmaceutical monopoly is NOT efficient because it produces at a quantity in which price is greater than marginal cost.