Question

From the point of view of a government concerned with economic inequality and/or with monopoly power, (how) would you amend this calculation of social surplus (when a project purchases an input from a monopolist)? Discuss in a short paragraph.

Answer 1

A monopolist do extract the consumer surplus. Hence, no question of existence of social surplus when a monopoly firm is in existence. Price discrimination is the policy of a monopoly firm where the monopolist charges differentiated price for the product. Hence they are likely to extract the maximum amount that each and every consumers are willing to pay for the commodity. But if we talk about inequality then according to the government monopoly power is very much essential for a economy where there is inequitable distribution of wealth and income. As previously mentioned, the monopoly charges different prices from different consumers according to their maximum willingness to pay, which follows nothing but the principle of 'Ability to pay'. Hence, when a project purchases an input from a monopolist, then, though social surplus may not be obtained but when question of inequality comes, monopoly power is helpful to remove inequality in the economy.