Question

A. Discuss the economic factors that lead to the development of monopolies. Examples of monopolies include electric utilities, railroads, airlines, cable television, and sports leagues. Focus your answer on one specific industry.

B. Compare the efficiency of monopoly and perfect competition. Which is more efficient? Explain your reasoning and illustrate with a hypothetical example.

Answer 1

A)There are different factors that lead to the development of monopolies. 1)Owning  of a key resource. 2)Regulation of the government and 3)Economies of scale.Ownership of important resources by a firm will prevent other sellers from entering the market.This will help the firm to establish a monopoly.However in reality this may not be the cause because important resources are present in different places in the world.Eg De Beers diamond dominated the market.Regulation of the government can control entry into the market through patents or copyright laws.Regulations increase the prospect of innovation and R&D research . Eg of government regulation is pharmaceutical industry.Again economies of scale lead to the development of natural monopolies when one single firm can produce the amount that two or more firms generally produce.Natural monopolies are so called because they are formed without government intervention.A natural monopoly may arise when fixed costs are high but the firm has economies of scale in output.This leads to decrease in average cost when output increases and this makes entry of new firms more difficult . Eg Electricity supply.In the US , in many cities , the airline industry is a monopoly.In 2015 a single airline controlled the market at 40 out of 100 largest US airports.Airlines industry is a natural monopoly as the government has retreated.

B)Perfect competion is allocative efficient as well as productive efficient . It is allocative efficient because price equals marginal cost and productive efficient because firms produce at the lowest point  on the average cost curve.A monopoly firm cannot achieve allocative or productive efficiency because a good is always priced higher than marginal cost.Due to this reason ,consumer surplus is less in monopoly.So perfect compitition is more efficient than monopoly.Agriculture market is an example of perfect competition because similar products are produced and many farmers produce them .Potatoes, carrots etc are generic products and price is equal to marginal cost.