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In: Economics

Show a Monopoly earning super normal profit and explain what are the costs of having monopoly...

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)

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Expert Solution

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.


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