and Policies regarding Monopolies
P116-119
1.
2.
3.
4.
Explain, using diagrams, why the profit maximizing
choices of a monopoly firm lead to allocative
inefficiency (welfare loss) and productive inefficiency.
Explain why, despite inefficiencies, a monopoly may be
considered desirable for a variety of reasons, including
the ability to finance research and development (R&D)
from economic profits, the need to innovate to maintain
economic profit, and the possibility of economies of
scale.
Evaluate the role of legislation and regulation in
reducing monopoly power.
Draw diagrams and use them to compare and contrast a
monopoly market with a perfectly competitive market,
with reference to factors including efficiency, price and
output, research and development (R&D) and economies
Where S = D in the market, (i.e MC =
 For a competitive firm, price equals
marginal cost.
 For a monopoly firm, price exceeds
marginal cost.
AR)
Price
Allocative inefficient price
and quantity
Marginal cost
Monopoly
price
Allocative efficient price
and quantity
PC
price
Marginal
revenue
0
Monopoly
PC
quantity quantity
Demand
Quantity
What do the
following
areas or
points
represent :
1. A
2. B
3. C
4. D
5. G
6. CFAO
7. DGBO
1. A = monopoly output
2. B = perfect comp output
3. C = monopoly price
4. D = perfect comp price
5. G= perfect comp equilibrium point
6. CFAO = monopoly total revenue
7. DGBO= perfect comp total revenue
8.But what is the triangle about?

While a market
with perfect
competition will
always move to
the output where
demand =supply
(AR=MC), a
monopoly will
operate where
MC=MR which
restricts output
and increases the
price causing a
deadweight loss
1.
Pass Antitrust laws



2.
3.
4.
5.
To prevent formation of mergers.
To break up large companies.
To prevent companies from performing activities
which make markets less competitive.
Establish a government department to promote
competition in markets. [In NZ the Commerce Commission]
Turning some private monopolies into public
enterprises (usually natural monopolies).
Regulate pricing – (see next 4 slides)
Doing nothing at all – why not? (see end of PPT
but this is where more research is needed).
1.
2.
Regulating the price to Allocative
Efficiency (e.g. in NZ the government
runs the Rail Service) – but may have to
subsidise a loss.
Regulate the price to a low or normal
profit situation. (no subsidy required but
neither is it allocatively efficient.)
Price
Marginal cost
Average
total cost
Average total cost
Regulated
price
Subnormal profit
Demand
0
Quantity
Price
Marginal cost
Regulated
price
Average total cost
Demand
0
Quantity
Markup pricing
mc
AC pricing
ac
MC pricing
mr
ar
Explain and illustrate why, despite
inefficiencies, a monopoly may be
considered desirable for a variety of
reasons, including:
◦ the ability to finance research and
development (R&D) from economic profits
◦ the need to innovate to maintain economic
profit, and
◦ economies of scale that results in lower
prices than a competitive market (even at
mark-up pricing).
1.
Why do governments regulate the prices in industries such as
natural gas and electricity?
Governments regulate the prices in industries such as natural gas
and electricity as they are essential resources for society. Firms produce
at the profit-maximizing level of output where MR=MC. In a natural
monopoly the marginal revenue experienced by a monopolist is less
than the price it charges. By default marginal cost will also be less than
the price, which leads to allocative inefficiency. This will cause a
shortage of electricity and prices becoming relatively less affordable.
The government is concerned of the welfare of society, which is why
they regulate prices in order to minimize or eliminate this allocative
inefficiency.
See
http://blogs.pamojaeducation.com/economics/2013/08/11/monopolyto-regulate-or-not/
2.
Why would a state government think that de-regulation of the
electricity industry might eventually result in lower prices in the longrun?
The deregulation of the electricity industry will cause new firms
to enter the industry. This will cause a more competitive market, which
will help lower prices in the long run. As more firms enter the market
the quantity supplied will increase, causing a decrease in the price of
electricity and eliminating any abnormal economic profits made in the
industry.