Why is monopoly harmful?
Why is a monopoly (i.e. a single seller with a downard-sloping curve) considered harmful and wasting resources (in terms of allocative and/or technical efficiency) if we use perfect competition as a benchmark? I know that one possible answer is that it makes economic profit in the long term. Why, however, is this inherently bad?
Answer:
It is also very important to note that the lower quantity produced by a monopolist (relative to the point where perfectly competitive firms would, in total, produce) follows NOT from the fact that there is only one producer. It follows, instead, from the *assumed* property that this monopolist cannot charge a different price to different consumers. IF we allow the monopolist to engage in "first degree price distrimination" than the deadweight loss disappears and the monopolist is both allocatively and productively efficient.
Also, the PROFIT is *never* the reason for allocative or productive inefficiencies! You will lose marks if you write this on a test. Allocative efficiency is *only* about marginal cost equaling price, while productive efficiency is *only* about minimizing costs for any given quantity output. So, a monoplist is always productively efficient and is only allocatively inefficient if we do not allow price distrimination.
because then the monopoly company can charge whatever they want for the products. They have no motivation to continue to improve their products so they sell the same crap to the public and suck the economy dry.
What incentive, then, would the monopoly have to offer improvement, variety and efficiency in the product or service?
The goal of the monopolist is to make the most profit in the long run as possible. Therefore, he produces fewer goods than are economically feasible, and charges consumer more for the items than they would pay for the goods..
Basically, the monopolist stops trades that would make sense for both sides in order to extract the maximum amount of profit (not revenue) from the consumer.
So, with trades that would increase overall societal utility not being done, monopoly is less efficient than perfect competition, in which all trades that are beneficial to both sides are completed. This occurs in perfect competition since, with no barriers to entry or exit, if a producer is unwilling to make a trade, another producer will step in.
Please note that both monopoly and perfect competition are theoretical constructs, and in reality, neither of these exist.
Trevor has the best correct answer.
Because they sell their products/services above price of the market equilibrium where the price and quantity are efficient. It gives them room to price gouge.
Monopolies have the power to raise the price and make less of their product (causing shortages and/or dead weight loss). They also cause barriers to entry in the market if its a pure monopoly because other businesses wouldn't be able to compete.
The short answer is that monopoly profits are maximized at a price that is higher and a quantity that is lower than the profit-maximizing firm's. This means consumers are paying more and getting less. This results in a distortion that makes the good produced by the monopoly appear more scarce than it really is, which tampers with price signaling, and denies the benefit of additional product to other consumers. In a microeconomic perspective it comes down to a loss of consumer surplus, some of which is absorbed by the monopoly (and becomes producer surplus), some of which is lost due as dead weight due the pricing distortions.
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Answer:
It is also very important to note that the lower quantity produced by a monopolist (relative to the point where perfectly competitive firms would, in total, produce) follows NOT from the fact that there is only one producer. It follows, instead, from the *assumed* property that this monopolist cannot charge a different price to different consumers. IF we allow the monopolist to engage in "first degree price distrimination" than the deadweight loss disappears and the monopolist is both allocatively and productively efficient.
Also, the PROFIT is *never* the reason for allocative or productive inefficiencies! You will lose marks if you write this on a test. Allocative efficiency is *only* about marginal cost equaling price, while productive efficiency is *only* about minimizing costs for any given quantity output. So, a monoplist is always productively efficient and is only allocatively inefficient if we do not allow price distrimination.
because then the monopoly company can charge whatever they want for the products. They have no motivation to continue to improve their products so they sell the same crap to the public and suck the economy dry.
What incentive, then, would the monopoly have to offer improvement, variety and efficiency in the product or service?
The goal of the monopolist is to make the most profit in the long run as possible. Therefore, he produces fewer goods than are economically feasible, and charges consumer more for the items than they would pay for the goods..
Basically, the monopolist stops trades that would make sense for both sides in order to extract the maximum amount of profit (not revenue) from the consumer.
So, with trades that would increase overall societal utility not being done, monopoly is less efficient than perfect competition, in which all trades that are beneficial to both sides are completed. This occurs in perfect competition since, with no barriers to entry or exit, if a producer is unwilling to make a trade, another producer will step in.
Please note that both monopoly and perfect competition are theoretical constructs, and in reality, neither of these exist.
Trevor has the best correct answer.
Because they sell their products/services above price of the market equilibrium where the price and quantity are efficient. It gives them room to price gouge.
Monopolies have the power to raise the price and make less of their product (causing shortages and/or dead weight loss). They also cause barriers to entry in the market if its a pure monopoly because other businesses wouldn't be able to compete.
The short answer is that monopoly profits are maximized at a price that is higher and a quantity that is lower than the profit-maximizing firm's. This means consumers are paying more and getting less. This results in a distortion that makes the good produced by the monopoly appear more scarce than it really is, which tampers with price signaling, and denies the benefit of additional product to other consumers. In a microeconomic perspective it comes down to a loss of consumer surplus, some of which is absorbed by the monopoly (and becomes producer surplus), some of which is lost due as dead weight due the pricing distortions.
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