Question

Explain why a firm that is a monopoly may be beneficial for society.

Answer 1

A monopoly firm can turn out to be beneficial for society because :

• Dynamic efficiency  

A monopoly firm can achieve dynamic efficiency over time by lowering its cost curves.

If the monopoly firm is - Protected from increased competition and provides strong intellectual rights (patent, trademark etc) that prevent theft of technology will allow firms to earn super-normal profits in the market.

Then they can again reinvest these profits back in their businesses which may result in -

• Higher quality products at potentially lower prices

Again, if these super-normal profits continue then we will have -

• Better technology and further lowering of cost

That's why it will turn out to be beneficial for the entire society as a whole.

• Natural Monopoly  

If there is a natural monopoly, the firm will observe declining average cost with size expansion.

So, it becomes possible for the firm to satisfy the whole market demand and sell at a lower price.

Hence, other firms it don't get a chance to enter the industry as allowing them will breed inefficiency.

Therefore, in some market, a natural monopoly that is regulated will give society a more desirable outcome and will be beneficial for society as a whole.

• Greater economies of scale

Typically monopolies are less efficient than the perfectly competitive firms.

But they still because of their sheer large size will be able to exploit greater Economies of scale.

That is they will be able to experience lower long-run average cost (LRAC) with increased production.

In certain markets it is absolutely true and it is especially valid if the firms are small.

In the diagram below it is clearly visible that -

1. Marginal cost (MC) curve of Monopoly firms is lower than the competitive ones

That's why it can be beneficial for the entire society as a whole because with Monopoly we get

• Higher output ( Q_M ) an at a lower price ( P_M)

• Promotes Research and Development

As the monopolies earn super-normal profits, they can reinvest in Research and Development ( R & D ).

They can, therefore, take high risks in developing life-saving drugs, or inventing new technologies.

This is especially true for Pharmaceutical and artificial intelligence where a small firm can't bear such high risk.

• Promote goods and services that are socially desirable  

As they earn super-normal profits they can simply cross-subsidize other goods they are promoting.

They can be very desirable from the society's point of view but promoting them may mean running into losses.

But, with their profits, they can actually bear the risk of promoting such goods for the overall benefit of the society