Question

Evaluate the validity of each of the following statements.

Be sure to clearly accompany your explanation using graphs and equations where appropriate.

a) Because the presence of a monopoly causes the economic “pie” to get smaller, we should not expect to see them exist in practice.

Answer 1

No, the monopoly may lead to a smaller economic pie i.e. a deadweight loss in the market but monopoly is desirable in some sense.

• An industry where the initial cost is very high and the economic return is very less a monopoly is most desirable. for example, a railway network. A railway network is very costly and a single firm can provide the service to many people more efficiently compared to many people involved in producing the same output. That is the reason it is government owned.
• Protect the invention: A monopoly arises when a firm invents some new product. IF that firm is not given better protection form the competition in the market it will lead to a loss and take away the incentive to invent.
• Natural monopolies is a situation when a single firm can produce a lot of goods using economies of scale at a cheaper cost rather than more smaller firms producing it.

In the above cases, the monopoly outcome is desirable so they should exist in the market.