Market failure in monopolies

Question 1

What is a pure monopoly?

Answer 1

• Market with only one supplier.

* Markets with more than one supplier will also be referred to as a monopoly if one supplier dominates the market.

Question 2

What is monopoly power?

Answer 2

The ability of a firm to influence the price of a particular good in a market. ( a firm with monopoly power can control the supply of a good to influence its price, the firm is able to be a price maker )

Question 3

Which firms have the greatest monopoly power?

Answer 3

Firms providing essential goods or services with no substitutes.

Question 4

How does elasticity affect monopoly power?

Answer 4

The more inelastic the demand for a product is, the greater the monopoly power tends to be.

Question 5

How do monopolies cause market failure?

Answer 5

• There is only one firm in the market, it could mis-allocate resources by restricting supply
• This is a market failure which causes a welfare loss ( there is an area which would have caused a consumer surplus, now added to firm’s profits )
• By restricting output, monopolies can fail to exploit some economies of scale.
• This means productive efficiency isn’t achieved, and the firm isn’t producing output at the lowest point on it’s average cost curve.

Question 6

Why may firms have higher costs of production in a monopoly than in a competitive market?

Answer 6

• Monopolies have less of an incentive to innovate to make a production methods as efficient and cost effective as possible.
• They have no incentive to cut costs as they are price makers.

Question 7

How is market failure caused by monopoly effects on consumers?

Answer 7

Consumer choice is restricted because there are fewer products to choose from, and monopolies won’t necessarily react to the wants and needs of consumers because they can set their own prices.

Question 8

How may monopolies bring benefits?

Answer 8

• In some markets, the most efficient way of allocation resources is to have one producer who’s able to exploit economies of scale and achieve productive efficiency. If the market consisted of lots of small producers, they wouldn’t be able to collectively achieve the same level of economies of scale or productive efficiency.
• Large firms can exploit large economies of scale, they can pass on cost savings to their consumers, who are able to take advantage of lower prices, this will help international competitiveness
• Monopolies can use their profits for research into new production methods and products. This could lead to innovation and better products being made available for consumers.