Monopolies

Question 1

Is a monopoly efficient?

Answer 1

• it is not productively efficient - don’t operate at the bottom of the AC curve
• not allocatively efficient - as price doesn’t equal MC
• may be or may not be dynamically efficient - its in the monopolies best interest to invest in R&D, etc, as they could cut costs more and make more profits, however due to no competition and laziness, they choose not to become more efficient

Question 2

What are some problems with a monopoly?

Answer 2

• increases price and restricts output, reducing consumer surplus
• productively and allocatively inefficient
• restricts consumer choice
• inefficiencies and waste due to lack of competition

Question 3

what are the potential benefits of monopolies?

Answer 3

• abnormal profits means that the monopolist could be dynamically efficient
• large levels of output could lead to lower prices if economies of scale are exploited
• a successful national monopoly is good for international competitiveness
• tax revenue for gov to spend on public services

Question 4

What do these problems and benefits of monopolies depend upon?

Answer 4

• whether its a pure monopoly
• whether there is international competition or just a national monopoly
• the level of contestability
• the level of regulation
• the objective of the monopolist - is profit their main objective?
• what they are doing with their profits

Question 5

What is a natural monopoly?

Answer 5

A natural monopoly occurs when the most efficient number of firms in the industry is one. It will typically have very high fixed costs, meaning that it is impractical to have more than one firm producing the good

Question 6

What are some examples of natural monopolies?

Answer 6

• gas network
• electricity grid
• railway infastructure
• broadband network