Essay Example on Monopoly is defined as a market where the seller faces no Competition








According to The Economic Times a monopoly is defined as a market where the seller faces no competition as he is the sole seller of goods with no close substitute economictimes com So too is it a major potential cause of market failure Economics Online refer to a market failure as when a market fails to produce and allocate scarce resources in the most efficient way economicsonline co uk Essentially a successful market functions on the basis that there is productive efficiency not wasting the limited resources available and allocative efficiency ensuring that what is produced is what is most wanted and required and is distributed accordingly Antonioni Masaki Flynn 2011 A market failure is when these factors are absent or ignored A monopoly being primarily profit led seeks to raise prices and lower output and subsequently risk functioning dangerously close to the border separating a healthy market and market failure In this essay I will explore the exact reasons as the why a monopoly can cause a market failure the potential welfare losses because of monopolies and finally what the government can do to ensure a healthy market when it is monopoly led as well as the established boundaries governments set within which monopolies can function How can a monopoly result in a market failure The complete absence of competition relieves the firm of any urgency to produce quick quality or well priced goods or services

This subsequently may lead to a wastage of resources due to a laziness in production and service e g If a firm had a monopoly over the supply of fresh oranges in the UK To increase the demand for them and in turn raise their value the firm will reduce the amount of oranges picked or sold Over time the unused and unsold oranges will go off and will be unsellable and soon there may be more rotten oranges than fresh This would mean that the natural resources were not being used to capacity and therefore a clear sign of an absence of productive efficiency subsequently highlighting a market failure Furthermore as a monopoly the MR curve of a monopoly firm selling oranges would be a steep downward slope meaning that the revenue for each additional orange sold would be less than that of the last orange sold The monopoly would be able to continue making a profit by selling a certain amount of oranges within a certain price range but once the price has been decreased past the optimal output point the firm begins to make losses as its total costs begin to outweigh its revenue subsequently decreasing its MR In this case a monopoly is not a sustainable market strategy because after a certain point the firm will not want to produce any more as it will further extend their losses

However the consumers willingness to accept the price and supply of oranges would be a necessity for the monopoly to function successfully If the consumer decided that they were not willing to buy at the previous price then the business may have to lower prices again which would trigger the beginning of losses being made However if the firm was to function at a point where profits are maximised whilst simultaneously losses are minimized MR MC the firm would successfully be able to continue running The firm could basically operate with any given combination of price and quantity up until the point where MR MC however by doing this the firm would not be capitalising upon the full use of resources available and thus result in a market failure Any combinations past the point MR MC will result in losses How can the public suffer as a result of monopolies In a competitive market the Demand curve will lie on or above the marginal cost curve suggesting people would be willing to pay for the good whose selling price is greater than its production cost Resulting in a profit Due to the diminishing marginal returns of a monopoly the costs of producing more goods eventually exceed the benefits of doing so which leads to monopoly to want to reduce outputs and therefore fail to meet consumer demand The deliberate withdrawal from selling producing goods to prevent losses results in a deadweight loss which is the total amount of money that could have potentially been made if the goods were sold to meet consumer demands Society is therefore harmed as they requirements and demands are not being met How can the government intervene

Governments can subsidise a monopoly for them to increase output and meet consumer demands Governments can subsidise the production costs of the monopoly in turn vertically moving the marginal costs curve downwards allowing for the maximum output of a monopoly to edge closer to that of a competitive firm Subsidies large enough could allow for a monopoly to even reach the point where they are able to successfully meet the demand curve whilst not making losses Governments can also issue patents which in turn create minor or real market monopolies The firm to which the patent is issued then benefits from 20 successive years to profit from the protection of their business or business idea So too does the government benefit from issuing patents Previously when patents didn t exist people would avoid launching their ideas and businesses due to the fact that soon their idea would be stolen and copied which led to a complete lack of creativity in the market By introducing the safety for inventors businessmen entrepreneurs creativity is encouraged and is no longer a risk This further expands the potential growth of the market deeming it an incentive for the government as well

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