Evaluate the view that Monopoly is always damaging for
economic welfare. (25 marks)
A monopoly is a market structure where a single firm often
dominates the market, and typically has a large amount of the
market share of roughly 40% or above. The market is
characterised by extremely high barriers to entry such as high
sunk costs or the requirement of expensive capital, it also
typically has a lack of substitutes for the product. The impact of
monopolies on economic welfare is broad as monopolies can both
benefit consumers but also harm them alongside other producers
and the economy.
Many argue that monopolies are damaging to economic welfare,
one of these reasons is allocative inefficiency. Allocative
inefficiency occurs when a free market fails to optimally allocate
all resources, this occurs in a monopoly as monopolies set prices
above MC (marginal cost) because they are often the price setters
due to their significant market power. This leads to the under
consumption of goods compared to what would occur in a
perfectly competitive market, resulting in allocative inefficiency
and a loss of any potential consumer surplus. This happens as a
result of the price rising, which will block lower income
households from consuming the good. They may also be
damaging to economic welfare due to the increase in productive
inefficiency, this occurs as monopolies lack competitive pressure
to become more efficient, minimize costs and as a result reduce
prices due to a lack of competition from other producers, this
means that monopolies will not use resources efficiently leading
to higher average costs.
Monopolies may also be damaging due to the anti-competitive
results of a monopoly, this means that monopolies may engage in
anti-competitive behaviour such as predatory pricing or lobbying
against regulations that harm the industry or encourage new
entrants into joining the industry (potentially by lowering barriers
to entry). This can result in more dominance over the market due
to a lack of entrants, which will both help to secure their long
term profits but may as a result, increase unemployment as new
entrants go out of business while the monopolies are unlikely to
economic welfare. (25 marks)
A monopoly is a market structure where a single firm often
dominates the market, and typically has a large amount of the
market share of roughly 40% or above. The market is
characterised by extremely high barriers to entry such as high
sunk costs or the requirement of expensive capital, it also
typically has a lack of substitutes for the product. The impact of
monopolies on economic welfare is broad as monopolies can both
benefit consumers but also harm them alongside other producers
and the economy.
Many argue that monopolies are damaging to economic welfare,
one of these reasons is allocative inefficiency. Allocative
inefficiency occurs when a free market fails to optimally allocate
all resources, this occurs in a monopoly as monopolies set prices
above MC (marginal cost) because they are often the price setters
due to their significant market power. This leads to the under
consumption of goods compared to what would occur in a
perfectly competitive market, resulting in allocative inefficiency
and a loss of any potential consumer surplus. This happens as a
result of the price rising, which will block lower income
households from consuming the good. They may also be
damaging to economic welfare due to the increase in productive
inefficiency, this occurs as monopolies lack competitive pressure
to become more efficient, minimize costs and as a result reduce
prices due to a lack of competition from other producers, this
means that monopolies will not use resources efficiently leading
to higher average costs.
Monopolies may also be damaging due to the anti-competitive
results of a monopoly, this means that monopolies may engage in
anti-competitive behaviour such as predatory pricing or lobbying
against regulations that harm the industry or encourage new
entrants into joining the industry (potentially by lowering barriers
to entry). This can result in more dominance over the market due
to a lack of entrants, which will both help to secure their long
term profits but may as a result, increase unemployment as new
entrants go out of business while the monopolies are unlikely to
