1. Monopoly and Market Failure
AS Economics

2. Aims and Objectives Aim:
Understand how monopolies cause market failure
Objectives:
Recap on barriers to entry
Define a natural monopoly
Provide examples of different monopolies
Analyse the effects of a monopolistic market

3. Starter
Write down as many barriers to entry as you can for a monopolistic market.
Draw the diagram to show a monopolistic firm restricting output.

4. Natural Monopoly
A market in which there is only room for one firm benefitting to the full, from economies of scale.
Until recently utility companies were monopolies, until they were privatised in the 1980s.

5. Opening Up Royal Mail to Competition
Royal Mail Case Study

6. Geographical Monopoly
Single grocery store in a village or a single petrol station on a busy road.
Local market of the store is too small for another shop.
Oil company uses property rights to exclude rivals.
People can of course shop elsewhere and fill up elsewhere, however it is costly and inconvenient to do so, meaning the shop and station has a great deal of market power.

7. Government Created Monopolies
Coal, rail and steel were nationalised companies. Were privatised in 1970/80s.
Government believed that a state monopoly would allocate resources more efficiently than a private firms.

8. How Economies of Scale may Justify a Monopoly
A monopoly benefitting from economies of scale
Average Cost
Average cost per unit of output C1 Q1
Quantity

9. Diagram Explained
Shows a natural monopoly where because of limited market size there is only room for one firm benefitting from economies of scale.
Economies of scale shown by downward sloping av cost curve.
A monopoly is able to produce output Q1 at an average cost of C1.
Whereas competitive firms are unable to produce at this output without destroying the competitive market.

10. Benefits of Monopolies
The conclusion that a competitive market produces a better allocation of resources than a monopoly depends on the assumption that no or few economies of scale exist in a competitive market.
When substantial economies of scale exist monopoly may lead to a better outcome than competition.

11. Further Benefit
If the monopoly’s products are protected by economies of scale or a patent, competitors cannot free ride on its’ success.
A monopoly can use their high profits to re-invest in R&D, producing new products.

12. Produce yourself a set of teaching notes and the monopoly diagrams
You are then to have an economist speed dating session.
You will have 3 minutes to tell your hot date all about monopoly in an attempt to ‘woo’ them with economics knowledge.
Your date will then score you out of ten.