Monopoly and Public Policy - Section 11, Module 62

monopoly is inefficient because the loss of consumers > gains of monopolist

• leads to net loss for economy → govts prevent/limit monopolies

profit maximization in monopolies versus in perfectly competitive:

• In perfect competition, there is NO producer surplus, and CS = TS

• in monopoly, PS>CS, and the amount of TS is smaller than in perfect competition because of DWL → net loss for society

  • happens because some mutually beneficial transactions do not occur

Sales tax/excise tax imposed on each unit of the good cause a larger deadweight loss

• lump sum doesn’t affect deadweight loss because it doesn’t affect MC or MR

If not a natural monopoly, the best govt policy is to prevent/eliminate the monopoly - antitrust policy

natural monopolies experience economies of scale due to a large fixed cost → ATC would be high if the market were split into different firms, but a single firm can bring the ATC down by spreading the fixed cost across many units of output

natural monopolies that profit maximize cause inefficiency because the price charged is higher than the MC

public policy to solve natural monopoly issue

• Public ownership: The industry is not controlled by a private monopolist, but rather by a public agency so that the consumer’s interests are protected

  • can set prices based on efficiency instead of profit maximization

• (Price) Regulation: Monopoly is left private, but has regulations on it

  • price is regulated to limit amount charged

In natural monopoly graphs:

• ATC curve is downward sloping over the range of output relevant to market demand because higher output = lower AFC

• productive efficiency: for price ceilings, Q = ATC, and P is directly across from that unit

• allocative efficiency: by setting price ceiling at ATC = d → breaking even