Question

I agree with the statement that monopolies are bad for social welfare compared to perfect competition. A monopoly is only one firm and they are "price-setters", meaning they get to determine the price of the product/service because there is no other competition. With that being said a monopoly may set the price of their product/service very high to earn more profit, but only those with a higher income would be able to afford the product/service. Everyone else would not have enough money to get the product/service. The only time I could think of where my answer would be different is if the monopoly cared about the welfare of society. In this case, the monopoly would set the price of their product/service at a point where the majority (or possibly everyone) could afford it. A perfectly competitive market may be bad for private welfare because private welfare is trying to earn a profit. If private welfare tried to raise the price of a product/service they would not succeed because consumers would just buy from the other firms in the perfectly competitive market. I personally like the idea of variety because then you have options, but I realize that if there was only one kind of a product it would make things much simpler and also possibly benefit the majority. Do you agree?

Answer 1

Responses are in bold:

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I agree with the statement that monopolies are bad for social welfare compared to perfect competition. A monopoly is only one firm and they are "price-setters", meaning they get to determine the price of the product/service because there is no other competition.

Though monopolies are price-setters, there are many sectors where a monopoly is the only natural choice. A natural monopoly occurs where no other firm can provide the good or service at such a low average total cost. For example, railways, electricity, gas-lines etc. A monopoly can't set just any price, as the demand curve it faces is downward sloping.

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With that being said a monopoly may set the price of their product/service very high to earn more profit, but only those with a higher income would be able to afford the product/service. Everyone else would not have enough money to get the product/service.

It is very likely that if a monopoly sets a price that is too high, the demand may fall to zero. A monopoly must set a price as per the MR = MC criteria, that determines quantity. This will enable it to maximize profits. It is true that people will too low incomes may not be able to afford it - the monopoly is a profit maximizer, and it doesn't act as per social welfare.

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The only time I could think of where my answer would be different is if the monopoly cared about the welfare of society. In this case, the monopoly would set the price of their product/service at a point where the majority (or possibly everyone) could afford it.

This may not happen in the case of a private monopoly. It is more likely in the case of a government regulated monopoly.

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A perfectly competitive market may be bad for private welfare because private welfare is trying to earn a profit. If private welfare tried to raise the price of a product/service they would not succeed because consumers would just buy from the other firms in the perfectly competitive market.

Profits are only possible if the firm can set a price above marginal cost. This is not possible in perfect competition. However, perfect competition also leads to homogenous goods and services. In other words, there is no variety.

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I personally like the idea of variety because then you have options, but I realize that if there was only one kind of a product it would make things much simpler and also possibly benefit the majority.

Proper variety is only possible in monopolistic competition, which is a blend of monopoly and perfect competition. In the two extremes, namely monopoly and perfect competition, variety is not the primary concern.

In perfect competition, total surplus is maximized. However, consumers are left devoid of any kind of variety. In monopoly, the producer is a market leader, who has reached that position after conquering all the other producers. In terms of product features, branding, uniqueness etc., a monopoly is likely to be better for the consumer. It is just that the monopoly is not for the "majority", but for a select minority.

Thus, most real world markets are somewhere in between these two extremes.