In: Economics
Show a Monopoly earning super normal profit and explain what are the costs of having monopoly in the economy. How can government prevent monopoly in the market? (5 +5 Marks)
Monopoly and its Effects
Monopoly is a market structure consists of a single seller. The
existence of monopoly in a market will have various problems in
economic aspect. Since free from competition, monopoly can earn
super normal profit by selling the commodity far higher than its
actual price. Rather from producing output at a level where
marginal cost is equal to marginal revenue, monopoly charge more
than the price where MC is not equal to MR thus receiving higher
returns from supplying less. Thus selling more than the normal
price, monopoly earns super normal profit.
The cost of having monopoly in an economy is the reduction in
consumer surplus and reduced utility from the consumption of goods.
High prices for goods charged by monopoly will reduce the ability
of consumer to consume up to their choice. Their choices and
utility are thus reduced to a minimum level because of the high
price charged for the commodities. Also, this situation pulls back
monopoly from producing to the actual demand an undergo
underproduction. The inefficiency in the supply of goods lead to
deadweight lost. This has a great impact on the economy for not
stimulating the demand thus reducing the ability of economy to
grow.
Government can prevent the chances of exploitation by monopoly
through regulation in taxations, regulating the optimum price
levels, reducing the complete ability of monopoly to perform
autonomously, implementing policies that reduce the favor of market
to monopoly and also by increasing competition in the market for
goods.