government monopoly economics definition

A monopoly can increase output to Q1 and benefit from lower long-run average costs (AC1). If a firm is in a competitive market and produces at Q2, its average costs will be AC2. For example, supermarkets squeezing prices paid to farmers. Monopolies may use their supernormal profits and monopsony power to pay lower prices to suppliers. Lack of competition may also lead to improved product innovation.

– higher average costs because it gets too big

Diseconomies of scale – It is possible that if a monopoly gets too big, it may experience diseconomies of scale.

Supermarkets have been criticised for paying low prices to farmers.

Higher prices to suppliers – A monopoly may use its market power and pay lower prices to its suppliers.

A monopolist makes supernormal profit Qm * (AR – AC ) leading to an unequal distribution of income. Therefore the AC curve is higher than it should be.

It is argued that a monopoly has less incentive to cut costs because it doesn’t face competition from other firms. A monopoly is productively inefficient because it is not the lowest point on the AC curve. In a competitive market, the price would be lower and more consumers would benefit A monopoly is allocatively inefficient because in monopoly the price is greater than MC. This leads to a decline in consumer surplus and a deadweight welfare loss Higher prices Higher price and lower output than under perfect competition.Blue area = Deadweight welfare loss (combined loss of producer and consumer surplus) compared to a competitive market.Red area = Supernormal Profit (AR-AC) * Q.Compared to a competitive market, the monopolist increases price and reduces output.This will be at output Qm and Price Pm.A monopolist will seek to maximise profits by setting output where MR = MC.

Government monopoly economics definition