Essay on The Existence of a Monopoly and Public Interest

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The Existence of a Monopoly and Public Interest

A monopoly is defined as the sole supplier of a good or service with no close substitutes in a given price range. A pure monopoly will therefore have a 100% market share i.e. the firm is the industry. They exist and can only remain as monopolies if there are high barriers to entry to the industry. In the case of a natural monopoly, economies of scale are so large that any new entrant would find it impossible to match the costs and prices of the established firm in the industry.
Other barriers to entry include legal barriers such as patents, natural cost advantages such as ownership of all key sites in the industry, marketing barriers such as advertising, and restrictive
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As a monopolist will always produce where MC=MR then this means that output will be produced, effectively leaving more demand than there is supply and will drive prices up to maximise profits. This means that assuming costs are constant there will be a large social welfare loss as shown by the Harberger triangle below, which compares a monopoly to competitive conditions:

Unlike perfect competition, monopolies won't produce at the bottom of their AC curve. This is because monopolies want to maximise profits and will therefore be productively inefficient. This comparison is shown below:

Monopolistic firms are also less likely to produce on their AC curve due to 'X-inefficiency'. This is where a company becomes too large to organise efficiently, meaning organisational slack. It is basically wastefulness and because monopolies are complacent they don't have the pressure to cut costs so there will be no incentive to be efficient.

Another argument against monopolies is the way there is allocative inefficiency. This is because monopolies create 'contrived scarcity' by limiting the supply of the good or service. Price is greater than
MC, and some consumers are therefore unable to purchase the good at this price.

Other arguments against monopolies include that lack of competition will prevent a monopoly from innovating or developing new products.
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