(a). Using appropriate diagrams, discuss whether monopoly is more efficient or
less efficient than perfect competition.
[10 Marks]
Answers should include:
• definitions of efficiency: allocative and productive efficiency, dynamic efficiency,
x-ineficiency
• definition and explanation of perfect competition
• the firm in perfect competition: in long-run equilibrium the firm
is allocatively and productively efficient
• correctly drawn and labelled diagram
• definitions and explanation of monopoly
• the firm in monopoly in long-run equilibrium the firm is neither
allocatively nor productively efficient
• correctly drawn and labelled diagram
• dynamic efficiency: increased profits of monopoly used for investment leading to
greater output and lower prices than in perfect competition (economies of scale)
Examiners should be aware that candidates may take a different approach, which if
appropriate should be fully rewarded.
(b) Evaluate the view that monopoly is an undesirable type of market
structure. [15 marks]
Answers may include:
 definition of monopoly
 comparisons between monopoly and perfect competition (the other
extreme market structure), e.g. price usually higher and output lower
Disadvantages:
 allocative and productive inefficiency
 failure by monopolist to produce at the socially optimum level of
output
 lack of choice for consumers
 lack of innovation and higher unit costs because of absence of
competition (x-inefficiency)
Advantages:
 possibility of lower unit costs and prices owing to economies of scale
 long run dynamic efficiency in monopoly
 benefits of natural monopoly
 benefits to some consumers of monopolistic price discrimination
 potential competition and contestable markets
Examiners should be aware that candidates may take a different approach, which if appropriate,
should be rewarded. Effective evaluation may be to:
consider short run versus long run consequences
examine the impact on different stakeholders
discuss advantages and disadvantages
prioritize the arguments