Question

How does the monopolist outcome for society compared to that of a perfectly competitive producer in the long run? Discuss two ‘inefficiencies’.

Answer 1

A monopoly is a type of market structure where there is only one seller producing goods and he is the price maker in the market for that good. Thus it has all the control over the price of the product.

Perfectly competitive market is a type of market structure where there are many sellers and buyers of the product in the market. All sellers produce homogeneous products and the firms are price takers. Thus they have no control over the price of the product.

Monopolist outcome for the society is inefficient as compared to the perfectly competitive producer because:

1. Since a monopolist has all the control over the price of the product as compared to a perfectly competitive firm that has no control over the price of the product, thus a monopolist can charge any price it wants to gain maximum profit. Whereas a perfectly competitive firm has no control over the price of the product and price are decided by market forces. Thus a monopoly charges a higher price as compared to a perfectly competitive market which is quite inefficient for the market and especially for the consumers.

2. Since the monopoly charges a higher price as compared to perfectly competitive firms, it supplies less output as compared to the perfectly competitive market. This means a monopoly supplies an inefficient level of output to society.

3. In a monopoly market, consumers have less consumer surplus as compared to a perfectly competitive market.