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Monopoly is less efficient than perfect competition---Do you agree?

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Ivor Lloyd-Rees ECONOMIC ANALYSIS OF THE FIRM 1) Monopoly is less efficient than perfect competition---Do you agree? Monopoly and perfect competition are alternative market structures and differ, on a general level, in the degree of competition that exists between the firms and the industry they are supplying to. We can define perfect competition as being a market structure in which there are many firms, as opposed to a monopoly where there is just one firm in the industry, and therefore little or more likely no competition from within the industry. A perfectly competitive market has unrestricted entry and because of the number of firms nobody in the market believes that their actions will have an effect on the market place. Firms will therefore behave very differently in these two market structures, being influenced by cost conditions and demand. This behaviour will have subsequent effects on performance in the market, mainly their efficiency. We therefore have two aspects to consider that will affect the efficiency of a firm, the market structure and behaviour. They are crucial to our understanding. Perfect competition is uncommon, in fact there are only a few industries that work under this market structure. ...read more.


It is possible to say that monopoly is a form of market failure. In order to grasp a fuller understanding we must now turn our attention to consumer surplus, that is the difference between the value of a good and its price as it is crucial to our understanding of the question. This is represented by the green triangle: With monopoly, consumer surplus is decreased as output is restricted to Qm. Consumers will therefore have to pay more for what is available and also get less of the good. The monopoly gains the difference between Pm and Pc on Qm (the quantity sold). This cannot be described as inefficient as it is a "redistribution from consumers to the monopolist" (Parkin et al.) There is still a consumer loss represented by the stripy grey area due to restricted output. Producer surplus (difference between producer's revenue and opportunity cost of production) is lost again due to restricted output. The loss of consumer and producer surplus is called the deadweight loss and is therefore a measure of the degree of market failure, and as previously mentioned monopoly can be described as a form of this market failure due to inefficiency in its market. ...read more.


This can be reduced by allowing the natural monopoly to charge a higher price than marginal cost. This is an average cost pricing rule and sets price equal to average total cost: We can see that price is equal to average total cost (ATC) and therefore the firm breaks even. However, the aim of any firm is to make profit and with these last two solutions profit has been achieved. If marginal revenue (MR) were to equal marginal cost, consumer surplus would decrease, increasing deadweight loss and thereby entering economic profit. However, we must consider the aspect of cost inflation. A regulated firm can increase the firms' costs by spending a lot of revenue on Inputs and thereby persuading the regulator that their cost curve is more then their true cost curve. We can see this here: We can therefore say that the greater the ability of the firm to deceive the regulator the greater the profits achieved. In summary, taxes and subsidies do not improve allocative efficiency as a tax on profits will not affect either marginal cost or marginal revenue. The natural monopolies will continue to produce at less than the efficient level of output. We can say that there are many policy options a firm might use to deal with natural monopoly. These include price discrimination and cost inflation. Government intervention is another factor that is widely practised. ...read more.

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