31 - Market Failures: Monopolies

Abstract

This chapter discusses how monopolies cause market failures. Monopolies are a source of economic problems because monopolies do not produce the same amounts of goods that competitive producers would in the same situation. Government regulation of monopolies is necessary because monopoly pricing and production practices reduce social welfare. The monopolist produces little total output, causing a loss in the net benefits from production. The government uses a variety of tools to influence monopoly production. Subsidies can be used to increase monopoly output, as can the use of price discrimination. More used, however, is the government's power to regulate production directly or to break up monopolies into competitive firms. A natural monopoly exists when average costs are greater than marginal costs at levels of output consistent with competition. Many competitive firms would go out of business under these conditions. Monopoly is the only form of market organization that can survive in these markets.