03. Cost and Benefits of a Monopoly

Question 1

Where does the DWL come from?

Answer 1

value of the trades that do no occur bc P>MC

Question 2

what arethe major costs of a monopoly?

Answer 2

• compared to competition, its inefficient (leads to loss in the gains from trade /DWL AND CS is less )

Question 3

Many monopolies around the world are born from…..

Answer 3

…. government corruption

Question 4

Potential benefits of monopoly?

Answer 4

e.g. pharmacy: if patent would be eliminated, competition would drive down the price down to MC +BUT it would costs about a billion dollars to produce the new average drug

if P=MC, firms can not recover their R&D costs

->patent increases incentive to produce drug in the first place; more monopoly reduces static efficiency, but can increase dynamic inefficiency (incentive to do research)

Question 5

In what case would there be benefits of monopoly?

Answer 5

• if goods have high development costs and low MC of production there are possible benefits of patent or copyright protection
• there is a policy trade off: lower prices today may generate fewer new idead in the future

Question 6

The government could buy the patent for a little more than the monopoly profits and then rip it up. competitiors would enter and drive the pruce of the drug down to its MC. Whats the downside?

1.
2.
3.

Answer 6

1. higher taxes - they also create DWL
2. difficutly in determining the right Price
3. possible corruption

Question 7

what are ways to navigate trade offs?

Answer 7

1. prizes (gov. pays firm if certain goal is reached, like a better light bulb)
2. price dicrimination