Question

Why are monopolies undesirable for an economy? Please write one paragraph with several reasons and examples.

Answer 1

Why are monopolies undesirable for an economy..

A MONOPOLY IS A SITUATION WHERE THE FIRM IS THE ONLY PRODUCER OR SUPPLIER OF CERTAIN GOOD OR SERVICE AND THUS IT ENJOYS A COMPETITIVE ADVANTAGE OVER ANY OTHER FIRM TRYING TO PROVIDE THE SIMILAR GOOD OR SERVICE.A MONOPOLY RESTRICTS FREE TRADE AND THE FIRM IS THE PRICE SETTER,THUS THE MARKET DOES NOT HAVE CONTROL OVER THE PRICES OF PRODUCTS IN AN ECONOMY.THERE ARE SEVERAL REASONS WHY MONOPOLIES ARE BAD OR WHY THE AFFECT THE MARKET IN A NEGATIVE WAY.WHEN THE DEMAND FOR GOODS IS INELASTIC LIKE GASOLINE,THE MONOPOLIES OFTEN RESORT TO PRICE FIXING AS THE CONSUMERS DO NOT HAVE MUCH OF A CHOICE BUT TO BUY PRODUCTS AT THE PRICE DICTATED BY THE MONOPOLIST.APART FROM SETTING HIGH PRICES,THE MONOPOLIST OFTEN PROVIDE INFERIOR QUALITY OF GOODS,THIS USUALLY HAPPENS IN POOR LOCALITIES AS THE PEOPLE DO NOT HAVE MANY ALTERNATIVE CHOICES AVAILABLE AND THUS THEY BUY INFERIOR QUALITY GOODS AT HIGH PRICES.IN A MONOPOLISTIC ECONOMY THE PRODUCERS OR SUPPLIERS HAVE NO COMPETITION AND SO THEY LACK THE INITIATIVE TO IMPROVE ON QUALITY OR DISCOVER AND INNOVATE NEW PRODUCTS .THIS CAN BE UNDERSTOOD BY THE EXAMPLE OF LOCAL CABLE TV PROVIDERS,FOR DECADES THEY RULED THE MARKET AND MADE NO INNOVATION IN THEIR SERVICES,AS THE CUSTOMERS HAD NO CHOICE THEY PAID FOR THE SAME SERVICE OVER THE YEARS UNTIL DISH TV SATELLITES AND ONLINE SCREENING CHANGED THEIR GAME.ANOTHER WAY IN WHICH A MONOPOLY IS BAD FOR THE ECONOMY IS BECAUSE MONOPOLIES OFTEN CAUSE INFLATION AS THEY SET HIGH PRICES WHICH RESULTS IN COST PULL INFLATION.THIS CAN BE UNDERSTOOD BY THE OIL SITUATION IN THE WORLD,THERE ARE A VERY FEW OIL PRODUCING COUNTRIES IN THE WORLD,SAUDI ARABIA BEING THE LEADING PRODUCER AND SO THEY OFTEN REDUCE THE PRODUCTION OF OIL AND DEMAND VERY HIGH PRICE FOR THE DESIRED OUTPUT.THUS MONOPOLIES HAVE SEVERAL ILL EFFECTS ON THE ECONOMY