Question

A. Some economists argue strongly that monopoly (or monopoly power) is a huge problem for the economy, and that the government needs to take vigorous action to eliminate or control monopoly (through the use of anti-trust laws or regulation). Other economists seem to believe that monopoly really isn’t a problem that we need to worry about that much. (20) 1. Why do some economists worry so much about monopoly –in what ways do they believe that monopoly is inferior to perfect competition? 2. What is it that convinces other economists that monopoly actually isn’t all that much of a problem? (Here are some questions that might be worth thinking about: What is the source of the monopoly? What are the effects of regulation or vigorous antitrust enforcement as compared to leaving the market alone? Are we talking about the short-run or the long-run?)

Answer 1

in perfect competition, we know that MR=Price and profit maximisation condition MR = MC, and MR = price.

thus MC therefore equals price , and hence allocative efficiency occurs.

but although in monopoly the monopolist produces where MC = MR, but price does not equal MR but at the point where equilibrium output line corresponds to the demand line , and the monopolist could thus be said to be allocatively inefficient.

monopoly is productive inefficient too because the firm is not operating on the lowest point of its AC curve but instead at some other higher point in contrast to that of perfect competition where the firm operates at the lower point of AC

when wetalk about productive and allocative inefficoency we talk taking reference of a particular point of time hence these are short run

Monopoly has been justified when we look over a period of time e.g when the technology advances etc..thus on the grounds of dynamic efficiency monopoly can be justified.The supernormal profits that monopolist make enables the monopolist to finance expensive research and development programmes and also provides the necessary inducement to undertake such programmes in the first place. In contrast to this, firms operating in a perfectly competitive environment may lack the incentive to finance expensive research and development programmes, as open access to the market would mean that their competitors would immediately be able to share in the fruits of any success