Mr. Bernstein Module 62: Monopoly and Public Policy December 3, 2014 AP Economics Mr. Bernstein Module 62: Monopoly and Public Policy December 3, 2014

AP Economics Mr. Bernstein Monopolies vs. Perfect Competition Qm < Qc Pm > Pc Monopoly p is > 0 Generally bad for consumers and good for the firm Is it bad for efficiency?

AP Economics Mr. Bernstein Welfare Effects of a Monopoly

AP Economics Mr. Bernstein Welfare Effects of a Monopoly In Perfect Competition There is no Producer Surplus Total Surplus in the triangle above P=MC=ATC and below D In Monopoly The steeper MR curve means Qm is lower than Qc Total Surplus is the area above MC=ATC and below MR and is less than in Perfect Competition PS is now positive; this a transfer from consumer to firm CS shrinks; part of area formerly CS now belongs to nobody Deadweight loss is the area under D and between Qc and Qm…represents beneficial transactions that do not occur

AP Economics Mr. Bernstein Preventing Monopoly Power Antitrust Laws Prevent formation of Monopoly via Mergers/Acquisitions or from ownership of critical resource input Natural Monopolies exist from Economies of Scale The ATC from one firm is lower than ATC from many competing firms Example: Utilities More efficient to allow and regulate Government could purchase and operate where PC=MC but governments are not good at minimizing MC (!)

AP Economics Mr. Bernstein Price Regulation

AP Economics Mr. Bernstein Price Regulation Alternatives Regulate to Perfect Competition Outcome Output = QC, Price = PC, there is no DWL and CS is maximized But loss is sustained - Utility would eventually go bankrupt Regulate so firm earns economic profit Output is OR, where PR = ATC Some Deadweight Loss occurs, but less than with unregulated Monopoly CS is larger than with unregulated Monopoly Regulate to compromise between Perfect Outcome (best for consumer, bankrupts firm) and No Regulation (worst for consumer, incurs deadweight loss)