Question

You need to offer an opinion around what is good or bad about a monopoly

Answer 1

Monopoly is a market where a single seller controls the entire supply of a product. The existence of monopoly creates adverse as well as favourable effect in an economy.

A monopoly is bad for the economy in the following cases.

1. Exploitation of consumers.

Since a single seller controls the entire supply of a product, he can charge any price for his product. Usually a monopolist fixes a price which is far higher than the marginal cost of the product. He fixes a maximum price that a consumer is willing to pay by restricting the volume of output. Again the monopolist practice price discrimination. He extracts the maximum price from each consumer for a single product. Thus the consumers are over exploited under monopoly.

2. Low quality product.

In the absence of rival competition, the monopolist often provides low and inferior quality goods. The consumers have no other option but to buy the products.

3. Allocative inefficiency.

A monopolist is allocatively inefficient. In a market the allocation is efficient when price charged in the market is equal to the marginal cost of the product. But under monopoly the monopolist charge a price higher than the marginal cost incurred by him. This cause reduction in social welfare.

4. Productive inefficiency.

A monopolist does not resort to cost reduction methods. In a market the resources are efficiently allocated when the goods are produced at the lowest minimum average total cost. But a monopolist never chooses to produce at the lowest point of the ATC because the aim of the monopolist is to charge a higher price by limiting the volume of output. This creates deadweight loss in the economy.

5. Unfair trade practice.

Very often the monopolist resorts to unfair trade practices to prevent the entry of rival firms into the market.

6. Lack of consumer choice.

Under competitive market the consumers have options to choose among a variety of products. But under monopoly the consumers have no option but to consume whatever product is available.

A monopoly is good for the society in the following cases.

1. Price stability.

Since a single seller controls the market, prices are stable in most of the time. But other markets are subject to frequent fluctuations in prices.

2. Promotion of growth.

The monopolist in certain ways contributes to the promotion of growth in an economy. The monopolist earns supernormal profit from their operations. These profits are utilized for capital accumulation, launching of new products or may use for research and development.

3. Source of government revenue.

The government can earn substantial revenue from a monopoly market. By taxing the monopoly profit the government can mobilize sufficient revenue for its fiscal operations.

4. Economic welfare.

The government can maximize economic welfare by controlling the monopoly through average and marginal cost pricing.