Question

Compare and contrast the key attributes of perfect competition and monopoly. Give examples of both market structures. Explain why monopoly is less socially efficient than perfect competition. If a monopoly is less socially desirable, why does the government allow monopolies to exist? Explain.

Answer 1

Answer - The key attributes are -

1 - The perfectly competitive market maximises the socially efficient outcome where monopoly reduces the efficiency

2 - The perfectly competitive market always earns normal profits whereas monopoly earns the positive economic profits.

3 - Competitive firm produces the socially optimum level of output whereas monopoly produces less than socially optimal output.

4 - Competitive firm is price taker whereas monopoly firm sets its own price.

5 - Competitive firm charges price at level of MR = MC. Monopoly charges the price above the level of MR = MC.

6 - There are no restriction on entry and exit of firm in competitive market. In monopoly the entry and exit have barriers.

The railways in India are example of Monopoly , as only the Indian government has the right to control it and entry is prohibited.

The roadside vendors selling same vegetables will be part of the competitive market.

Monopoly charges the price above the MR = MC level , through this , it reduces the consumer surplus. This creates the deadweight loss in market and creates market failure. It also produces less than optimal level of output , which also creates inefficiency in market.

The government allows some of the monopolies to exist , despite the fact of the existance of inefficiencies in market , whenever it feels that compeition may destroy the allocation of any resources , or it may ruin the aimed social welfare , or the consumer would be worse off due to more competition. Also if it feels that it will be dangerous to handover a resource to competitive market , it allows the monopoly to exist in order to avoid the disruptive behaviour.