Lecture 4 - Social Costs Of Monopoly Flashcards
When is allocative efficiency achieved
When there’s no possible reallocation of resources that could make one agent (producer or consumer) better off without making at least one other agent worse off
- Necessary condition = Marginal benefit (to society as a whole) of an additional unit of output being produced equals the marginal cost of producing the additional unit of output
- Total quantity of output produced should be such that price equals marginal cost P=MC
What is allocative inefficiency
If price exceeds marginal cost, that value that society would place on an additional unit of output (measure by price the most marginal consumer is prepared to pay) excess the cost of producing that unit. Welfare could be increased by producing more output
If price is below marginal cost, value society would place on an additional unit of output is less than cost of producing that unit. Welfare could be increased by reducing output
Why is there deadweight loss in monopolies
They sell at a higher price and produce less
Why’s there not efficient allocation of resources in monopoly
Monopolist fail to produce at the minimum efficient scale (MES), therefore fails to produce at the minimum attainable LRAC.
In contrast, perfectly competitive firms produce at the minimum attainable LRAC
What did Harberger (1954) Assume
- All firms operated on the long run AC curve
- Markets cleared
On these assumptions variations of rates of return can be taken to imply resource misallocation - if we see deviation from a ‘normal’ or average rate of profit this implies resource misallocation connected to monopoly power
When does X inefficiency happen
When a lack of effective/real competition in a market or industry means that average costs are higher than they would be with competition and is associated with product inefficiency
X inefficiency
What does competitive forces encourage firms to do
- Improve Internal organisation
- Introduce of new technology
What does Leibenstein suggest about X-efficiency
X-efficiency are likely to be greater than those from eradicating the deadweight monopoly welfare loss as discussed
- He did contend that competition rather than monopoly was likely to be more effective at improving efficiency
Is LRAC lower for monopolies or when there’s competition
LRAC is Lower for monopolies
Is monopoly always bad?
According to SCP paradigm, perfect competition is the market structure with the most favourable efficiency and welfare properties
- However not all economists think monopolies are the worst
Reason why monopolies are more effective than the other market structures that consist of competition
Monopolists can operate on a lower LRAC and LRMC function than the firms comprising the perfectly competitive industry
- For Example, exploiting economies of scale in research and development, the monopolist might be able to gain access to a production technology that is not available to a group of perfectly competitive firms
What is the welfare like under monopoly compared to perfect competition
Welfare is higher under monopoly than it is under perfect competition
Because LRMC and LRAC are lower for monopolies compared to Perfect competition and the larger the difference, the more likely welfare is higher under monopoly
The paradox of competition
- The competitive process can pose a dilemma
- Each competitor strives to win
- But if one wins in a big way competition is replaced by a substantial degree of monopoly and monopoly power
- So competition seems to be self-destructive - the new dominant firm will prevent future competition from being effective
- Effective competition needs parity; victory by one competitor destroys parity
