This is a question for which there is unlikely a unique set of answers. Instead

Question

This is a question for which there is unlikely a unique set of answers. Instead the value of an answer will depend upon its validity and support. Provide two reasons why you would argue that monopolies or firms with market power (i.e. facing downward sloping demand curves) are a positive impact on society and the economy. Also provide two reasons why you would argue that monopolies or firms with market power (i.e. facing downward sloping demand curves) are a negative impact on society and the economy.

Explanation / Answer

The two reasons i would argue that monopolies or firms with market power (i.e. facing downward sloping demand curves) are a positive impact on society and the economy are as follows

Research and Development. Monopolies can make supernormal profit; this can be used to fund high cost capital investment spending. Successful research can be used for improved products and lower costs in the long term. This is important for industries like telecommunications, aeroplane manufacture and Pharmaceuticals. Without monopoly power that a patent gives, there may be less development of medical drugs.

Economies of scale. Increased output will lead to a decrease in average costs of production. These can be passed on to consumers in the form of lower prices. See: Economies of Scale This is important for industries with high fixed costs, such as tap water and steel production.

The two reasons why I would argue that monopolies or firms with market power (i.e. facing downward sloping demand curves) are a negative impact on society and the economy are as follows

Giving you many , you can select your choice of two

ess choice

Clearly, consumers have less choice if supply is controlled by a monopolist – for example, the Post Office used to be monopoly supplier of letter collection and delivery services across the UK and consumers had no alternative letter collection and delivery service.

High prices

Monopolies can exploit their position and charge high prices, because consumers have no alternative. This is especially problematic if the product is a basic necessity, like water.

Restricted output

Monopolists can also restrict output onto the market to exploit its dominant position over a period of time, or to drive up price.

Less consumer surplus

A rise in price or lower output would lead to a loss of consumer surplus. Consumer surplus is the extra net private benefit derived by consumers when the price they pay is less than what they would be prepared to pay. Over time monopolist can gain power over the consumer, which results in an erosion of consumer sovereignty.

Asymmetric information

There is asymmetric information – the monopolist may know more than the consumer and can exploit this knowledge to its own advantage.

Productive inefficiency

Monopolies may be productively inefficient because there are no direct competitors a monopolist has no incentive to reduce average costs to a minimum, with the result that they are likely to be productively inefficient.

Allocative inefficiency

Monopolies may also be allocatively inefficient – it is not necessary for the monopolist to set price equal to the marginal cost of supply. In competitive markets firms are forced to ‘take’ their price from the industry itself, but a monopolist can set (make) their own price. Consumers cannot compare prices for a monopolist as there are no other close suppliers. This means that price can be set well above marginal cost.

Net welfare loss

Even accounting for the extra profits derived by a monopolist, which can be put back into the economy when profits are distributed to shareholders, there is a net loss of welfare to the community. Welfare loss is the loss of community benefit, in terms of consumer and producer surplus, that occurs when a market is supplied by a monopolist rather than a large number of competitive firms.

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