Answer to Question #140553 in Microeconomics for Blue

Question

It is argued that monopoly is a bad thing for consumers, but a good thing for producers. Illustrate the argument using diagrams and assuming the industry is faced with constant cost.

Answer 1

$$Solution$$

Monopolies can be criticized because of their potential negative effects on the consumer, which include;

• Restricting output onto the market.
• Reducing consumer surplus and economic welfare.
• Restricting choice for consumers.

The traditional view of monopoly stresses the costs to society associated with higher prices. Because of the lack of competition, the monopolist can charge a higher price (P1) than in a more competitive market (at P) as will be shown in the diagram below.

The area of economic welfare under perfect competition is E, F, B. The loss of consumer surplus if the market is taken over by a monopoly is P P1 A B. The new area of producer surplus, at the higher price P1, is E, P1, A, C. Thus, the overall (net) loss of economic welfare is area A B C