Question

Innovation often involves a temporary monopoly before it is copied by others. You’ll know from studying microeconomics that monopolyinvolves a deadweight loss in terms of social welfare. Why then might governments not look on temporary monopoly as a problem when it is associated with innovation?

Answer 1

Monopoly is existence of one seller and multiple buyers. Also Monopoly does not always lead to efficient markets . Efficiency is when price is equal to marginal cost but in case of monopoly, the monopolist has the power to control either the price or output which means that it is earning supernormal profits . In such a case there arises deadweight loss ie the loss to the society as a whole (neither the producer nor consumer is gaining ).

Innovation creates temperory monopoly but till the time the idea is used by other firms as well. Innovation is essential to create new ideas or increase the stock of existing ones. If innovation does not exist in the market , there would be stagnancy which is harmful for the growth and development of the economy.

Government while trying to prevent monopolies in certain cases because it reduces efficiency , does not take temporary monopoly as a problem because it believes that innovation is required for the development of the economy. Moreover the abnormal profits earned by these monoplies during this short time works as an incentive for them and other firms to create new ideas. These surplus or profits could furthur be used for Research and development or to increase the stock of human capital and knowledge.

Hence Government despite the deadweight loss does not see temporary monopoly in case of innovation as a problem because it works for a greater welfare of society and increase of ideas.

(You can comment for doubts )