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In: Economics

Perfect competition is a market structure controlled by market forces. When market forces are not met,...

Perfect competition is a market structure controlled by market forces. When market forces are not met, we have imperfect competition. I believe that monopolies are bad for social welfare. Monopolies control everything in their specific market. They control market prices because there is no competition. Monopolies can set prices extremely high to increase profits which is bad for consumers who are of a lower social class or consumers who simply cannot afford these prices. If monopolies did not have high sell prices, then my opinion would change. What do you this about this.

Solutions

Expert Solution

For the society as a whole, in terms of efficiency, monopolies are bad. This is because they increase the price for a large number of consumers and provide a lower quantity compared to perfect competition. the result is a reduction in consumer surplus and generation of deadweight loss.

However it is not appropriate to consider that Monopoly can charge extremely high prices. The demand curve faced by the Monopoly represents the maximum willingness to pay. Monopoly cannot charge a price which is greater than the maximum willingness to pay. Also note that there are certain sectors such as the pharmaceutical sector in which there is a requirement of heavy research and development. competitive market cannot indulge in heavy research and development unless there are economic profits in the long run ensured to the firms. Only monopolies, with the help of patent and copyright, are likely to innovate and discover because they expect Monopoly power to charge higher prices once they get the patent.

Considering these facts, we can conclude that monopolies do reduce the welfare of the society but they also contribute in innovation and therefore they are not necessarily bad.


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