The Existence of a Monopoly and Public Interest Essay -- Monopolies Ec

The Existence of a Monopoly and Public Interest A monopoly is defined as the sole supplier of a good or service with no close substitutes in a given price range. A pure monopoly will therefore have a 100% market share i.e. the firm is the industry. They exist and can only remain as monopolies if there are high barriers to entry to the industry. In the case of a natural monopoly, economies of scale are so large that any new entrant would find it impossible to match the costs and prices of the established firm in the industry. Other barriers to entry include legal barriers such as patents, natural cost advantages such as ownership of all key sites in the industry, marketing barriers such as advertising, and restrictive practises designed to force any competition to leave the market. In this market structure it is also assumed profits are maximised and there is consumer rationality. Traditionally monopoly is thought to be a potentially harmful market structure with unwelcome consequences for the consumer and the economy. Competition has always therefore been seen to be desirable. It could be said therefore to be against the public interest. However there are arguments not only against monopolies but also for their existence. One of the main arguments against monopolies is that they raise prices, restrict output and therefore exploit consumers. This is because the neo-classical theory of the firm assumes that a monopolist will maximise profits which means it will produce where MC=MR. The equilibrium profit maximising level of output will therefore be where MC-MR. This is shown below: The diagram above shows the firm will produce the quantity Qe and will charge the price Pe. As the monopolist above is... ...s to large firms in the economy. Should it split them up or promote such firms. Competition policy therefore reflects the attitude towards monopoly. At the moment the UK has a pragmatic approach where monopoly can be good or bad. I t uses the monopolies and mergers commission to use a case-by-case approach. Competition policy is a government policy to influence the degree of competition in individual markets within the economy. Governments can also attempt to correct market failure caused by monopolies by taxing supernormal profit away, set maximum price levels, subsidise production, nationalise the industry, break it up or reduce entry barriers. In the past economists have generally come out against monopolies and in favour of competitive markets. However, this is clearly not conclusive as monopolies have many potential advantages and disadvantages. The Existence of a Monopoly and Public Interest Essay -- Monopolies Ec The Existence of a Monopoly and Public Interest A monopoly is defined as the sole supplier of a good or service with no close substitutes in a given price range. A pure monopoly will therefore have a 100% market share i.e. the firm is the industry. They exist and can only remain as monopolies if there are high barriers to entry to the industry. In the case of a natural monopoly, economies of scale are so large that any new entrant would find it impossible to match the costs and prices of the established firm in the industry. Other barriers to entry include legal barriers such as patents, natural cost advantages such as ownership of all key sites in the industry, marketing barriers such as advertising, and restrictive practises designed to force any competition to leave the market. In this market structure it is also assumed profits are maximised and there is consumer rationality. Traditionally monopoly is thought to be a potentially harmful market structure with unwelcome consequences for the consumer and the economy. Competition has always therefore been seen to be desirable. It could be said therefore to be against the public interest. However there are arguments not only against monopolies but also for their existence. One of the main arguments against monopolies is that they raise prices, restrict output and therefore exploit consumers. This is because the neo-classical theory of the firm assumes that a monopolist will maximise profits which means it will produce where MC=MR. The equilibrium profit maximising level of output will therefore be where MC-MR. This is shown below: The diagram above shows the firm will produce the quantity Qe and will charge the price Pe. As the monopolist above is... ...s to large firms in the economy. Should it split them up or promote such firms. Competition policy therefore reflects the attitude towards monopoly. At the moment the UK has a pragmatic approach where monopoly can be good or bad. I t uses the monopolies and mergers commission to use a case-by-case approach. Competition policy is a government policy to influence the degree of competition in individual markets within the economy. Governments can also attempt to correct market failure caused by monopolies by taxing supernormal profit away, set maximum price levels, subsidise production, nationalise the industry, break it up or reduce entry barriers. In the past economists have generally come out against monopolies and in favour of competitive markets. However, this is clearly not conclusive as monopolies have many potential advantages and disadvantages.