Question

Why are monopolies undesirable for an economy?

Answer 1

A monopoly is a market structure in which a firm is considered to be the industry i.e. there is a single seller of the commodity, who is the price maker for its product.

Under a monopoly, equilibrium is attained at a point where marginal revenue = marginal cost i.e. MR = MC

Diagrammatically,

At the equilibrium point, MR = MC, equilibrium quantity= Q and corresponding equilibrium price = P

At this point, consumer surplus is reduced due to higher prices and producer surplus is increased.

As compared to a perfectly competitive equilibrium, which is considered to be socially efficient, equilibrium is attained at P = Mc, with equilibrium price Pc and equilibrium quantity Qc.

Clearly, the shaded area in the diagram represents the deadweight loss.

Thus, restriction in competition due to barriers to entry leads to a lower output and increased costs, thus leading to inefficiencies in monopoly operation.