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Monopoly and Antitrust Policy
The Social Costs of Monopoly

We have seen that the monopolist charges a higher price than a perfectly competitive firm would charge. The monopolist also produces less than a perfectly competitive market. If you suspect that this is not good for consumers, you are right!

Inefficiency and Consumer Loss

Monopoly leads to an inefficient mix of output. The monopolist produces a quantity at which MR = MC, but since MR is less than P, at that level of output P > MC. Since the price is greater than the marginal cost for the monopolist, demanders are willing to pay more for one more unit than the marginal cost of making one more unit. The monopolist will not sell them that unit, though. Therefore, the monopolist cannot be making the allocatively efficient quantity.

One of the ways that economists measure the cost of monopolies to society is by looking at the loss in consumer surplus from the monopolist producing less than the efficient quantity. Consumer surplus is the difference between what people are willing to pay (the demand curve) and the price for each unit. Consider the figure below.

12.9.gif

Imagine that the monopolist produced one more unit than Qm. The consumer surplus from that unit would be the difference between the demand curve and the price for that unit. Now imagine that the monopolist produced all of the additional units it would take to make the efficient quantity. The area of the blue triangle represents the additional surplus that consumers would get if the market were efficient. In other words, the area of the triangle is the loss in consumer surplus that results from the monopolist’s under-production.

This under-production and the loss of consumer surplus associated with it are problems inherent with all of the imperfectly competitive markets.



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