Monopoly and
Market Failure
AS Economics
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
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.
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.
Opening Up Royal Mail to
Competition
 Royal
Mail Case Study
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.
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.
How Economies of Scale may
Justify a Monopoly
A monopoly
benefitting
from
economies of
scale
Average
Cost
Average cost
per unit of
output
C1
0
Q1
Quantity
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.
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.
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.

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.