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Explain the possible monopolies for resource allocation and welfare
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Introduction:
To explain the possible monopolies for resource allocation and welfare we have to make it clear what
these terms mean
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This
firm is called a monopolist or monopoly firm
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(Parkin M
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, Economics Second Edition,
2007:13)
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Governments should legislate to prevent monopolies because of the potential
welfare loss arising from the exploitation of monopoly power, or another reason is that the
monopoly price is higher than the marginal or average costs, and so on
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It can
be formed in five ways: first is trough the direct action of a government in charge of a country;
second way is for a corporation to force its competitors to leave the business; third way is by
colluding or merging with its competitors; fourth way is the acquisition of property rights to specific
natural resources required to make a product and the last one is when a corporation manages to
surpass all other competitors and drives the out of business
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When there is a single-price monopolist, the
firm’s profits depend on the relationship between its production cost and its sales revenues
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The monopolist must lower the price of all units in order to sell an extra unit
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When there is a multi-price monopolist, the monopoly firm finds

it profitable to sell different units of the same product at different prices whenever it gets the
opportunity
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Despite the fact that market leadership of firms like Microsoft are often
criticized, their investments on research and development lead to expansion in the technological
frontier and open new ways to prosperity, which is beneficial to society
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The standard economic case against
monopoly is that with the same cost structure, a monopoly supplier will produce at a lower output
and charge a higher price than a competitive industry
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According to Arnold C
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b) Possible monopolies for allocation of resources and welfare

1
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According to most of the articles that I have read, monopolies are under constant critics of being
polutive, straining to competition and they are accused of worsening resource allocation
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Many monopolies are government owned which means that the incentive to strive for more profit
and better conditions is gone
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These characteristics are
also seen in some privately owned monopolizing firms
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, the external costs in a competitive industry will
often b pollution, seeing that the firm will strive hard to diminish their costs resulting in the firm
ignoring ‘unnecessary’ costs The monopoly owned by the government would never be able to ignore
such a serious matter, and they would have to pay the costs
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To fully utilize capital, a lot of labour is needed, labour which a
monopoly is expected to have, while smaller competitive firms may lack
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Welfare –
The debate about monopoly will never be settled
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Because there is a potential economic welfare loss arising from the
exploitation of monopoly power, the government regulates some monopolies
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c) Should governments legislate to prevent monopolies?
‘Government is am organization that provides goods and services an redistributes income and
wealth’ (Parkin M
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, Economics Second Edition, 2007:13) Governments provide services as
national defence, health services and education
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Second,
another reason is that, monopoly price is higher than marginal and average costs leading to a loss of
allocative efficiency and a failure of the market mechanism
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Third, the natural monopoly through the exploitation
of economies of scale can in theory undercut any actual or potential rivals purely on the grounds of
cost
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Forcing such a
company to price at marginal cost would also inflict inevitable losses and threaten the long term
financial viability of the supplier
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Monopolies faced with a large number of consumers can force up the market price by
restricting their output
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Governments should legislate to prevent
monopolies because some monopolists can earn abnormal profits at the expense of an economic
efficiency, or sell products on a price which is higher than the costs for the making of these products
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References:
1
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, Burstein M
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, 1976, Resource allocation and economic policy, The Macmillan
Press LTD
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Harberger A
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, Monopoly and Resource Allocation,

May 1954

3
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4
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, 1964, Monopoly Power and Economic Performance, W
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Norton and
Company, Inc
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Parkin M
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, 1995, Economics Second Edition, Addison-Wesley Publishing Company Inc
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Rilley G

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