The Inefficiency of Monopoly

Modern civilizations have been able to thrive because societies have established
free market socioeconomic systems that operate by working to efficiently allocate the
production and distribution of available resources. Many affluent countries use a free-
market system through which buyers and sellers freely interact in exchange with little
government influence. These systems are able to regulate themselves efficiently
because they rely on perfect competition. This economic system has brought great
wealth to industrialized countries, but it has also enabled the rise of business
monopolies that are so successful that they have eliminated competition. Monopolies
are often seen as a fault of the system because they disrupt the natural allocative and
productive efficiency of free markets. Its important to critically evaluate the role of
monopoly in the free-market systems and determine if they are beneficial or detrimental
to society.
Monopolies are not allocatively efficient. Monopolies provide goods and services
that dont have close substitutes produced by other firms because they have no
competition. As a result, monopolies and are able to charge higher than natural market
prices. A monopoly will charge the highest price that consumers are willing to pay. This
pricing scenario is very different from businesses that operate in pure competition
because they only produce goods that are in demand at a price that is equal to their
marginal cost. In pure competition, consumers have choices and will naturally pick
goods for a lower cost. When firms compete, the social surplus is maximized because
every consumer whose marginal benefit exceeds the price is able to benefit from the
purchase. When a monopoly controls the price, a deadweight loss occurs because
consumers with less marginal benefit are excluded. Monopolies are allocatively
inefficient because of their ability to control the price of goods to their advantage and not
necessarily to the advantage of society.
Not only are monopolies not allocatively efficient, they are also not productively
efficient. Monopolies restrict output to further enable the ability to drive up prices and
increase profits. By doing so, monopolies produce less than the socially optimal output
level. The optimal output is attained by purely competitive markets because these
markets produce at the level where marginal cost equals marginal revenue. The
economic logic behind this production is that revenue generated from producing more is
greater than the cost of producing more, so there is more profit to be gained from
producing more and respectively the opposite is true when the revenue from producing
more is less. The only point where there is no profit to be gained by increasing or
decreasing production is when the extra revenue generated is equal to the extra cost.
This is MR=MC. At this point, the market is balanced or in a state of equilibrium. There
are not shortages or excesses. Monopolies never produce to a point of equilibrium, so
they are productively inefficient because of their ability to restrict output.
If monopolies are allocatively and productively inefficient, it is a wonder that they
are of economic benefit at all. While consumers have little say, there are some
advantages to monopoly. Monopolies are able to make supernormal profit which can be
used to fund research and development. Increased output can lead to lower average
costs of production that are passed on as lower prices to consumers. Domestic
monopolies can be internationally competitive with monopolies in other countries.
Individual firms have something to strive for through successful innovation.
Its difficult to determine if monopolies are essentially bad or good for society
when the advantages are weighed against the disadvantages. The government is able
to intervene to influence the monopoly to charge a lower price to make their product
assessable to a wider amount of people. The government will continue to do this at its
own discretion when monopolies exert too much power, but its important that citizens
are more aware of the economic impact of monopolies and how they affect their choices
as consumers.

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Free Market Efficiency Monopoly Inefficiency