Are Monopolies Desirable?

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Presentation transcript:

Are Monopolies Desirable?

Characteristics of Monopolies Firm is the Industry Allocatively Inefficient Firm is a Price maker Demand > Marginal Revenue Barriers to Entry

Review Efficiency 1. allocative efficiency: P = MC 2. productive efficiency: P = ATC at its minimum point

Allocative Efficiency optimal distribution of goods and services. socially optimum price. An output level where the price = Marginal Cost (MC) price consumer's are willing to pay is equivalent to marginal utility Optimal distribution: marginal utility of the good =MC Perfectly Competitive firms produce allocatively efficient level of output Monopoly sets a price of Pm. allocatively inefficient Price is greater than MC.

A Monopoly’s impact on consumer surplus and deadweight loss. Image from http://tutor2u.net/economics/content/topics/competition/efficiency.htm

Monopolies Are…. allocative inefficiency: P >MC a) underallocation of resources smaller output than competitive markets b) higher prices than competitive markets 2. productive inefficiency a) not producing at minimum ATC b) cost complications like natural monopolies due to economies of scale – one firm can produce at a lower cost than others

Types of Monopolies Natural- often utility companies- fair rate of return price Unregulated- created by capturing economies of scale- profit maximizing Regulated- government controlled (maybe even subsidized- socially optimal price

Image From http://www. harpercollege

Pricing and Monopolies Be Aware of where the ATC is when measuring monopoly profit! At a fair return price there are zero economic profits being made Price discrimination is possible

Can a Monopoly experience loss? ABSOLUTELY! Image from http://www.econweb.com/Sample/Monopoly/ProfitMax16.html

What is a reasonable level of profits for a monopoly to make? Hmm What is a reasonable level of profits for a monopoly to make? Should all monopolies be regulated? Which part of the demand curve will a natural monopoly make its price Why can monopolies practice price discrimination?