Question

Compare and contrast the key attributes of perfect competition and monopoly. Give examples of both market structures (be creative). Explain why monopoly is less socially efficient than perfect competition. If monopoly is less socially desirable, why does the government allow monopolies to exist? Explain. (minimum 200 words)

Answer 1

In perfect competition there are many sellers and entry and exit in the industry is free. In monopoly, there is only one seller and restrictions exist on entry and exit.

In perfect competition, products are homogenuous. In monopoly, products have no close substitutes.

In perfect competition, profit is maximized when MR= MC, there is no deadweight loss. In monopoly, P > MC, and so there is deadweight loss in a monopoly.

A perfectly competitive firm has a horizontal demand curve, a monopolist faces a downward sloping demand curve.

A monopolist practices price discrimination, sharing different to different groups of customrs for the same product. This is not done in perfect competition.

Example of a monopoly is public utilities like electricity, water supply.

Example of a perfectly competitive firm is agricultural products like vegetables, fruits, food grains.

Since P > MC in monopoly, output is less than that in perfect competition and prices are also higher. It is socially inefficient. When MC= D, then it is socially efficient.

The government allows monopoly in certain sectors like public utilities where the start up costs are very high and competition is not feasible.