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

2. 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?

3. AP Economics Mr. Bernstein
Welfare Effects of a Monopoly

4. 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

5. 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 (!)

6. AP Economics Mr. Bernstein
Price Regulation

7. 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)