Overview: Efficiency and Monopoly

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When economists recommend that a government take some policy action, they are no longer dealing only with positive economics. Their policy recommendation must be based on some perception of what is desirable and what is undesirable, which is a normative judgement. Policy recommendations involve a merger of positive economics and normative judgments—a merger of understanding how the world works (which can, of course, be flawed) and belief about what an ideal world would look like. The concept of economic efficiency is the most common normative criterion that economists use.

This group of readings examines how the concept of economic efficiency shapes the way economists approach policy decisions concerning monopoly. It shows that the introduction of monopoly into a competitive economy results in economic inefficiency because the monopolist sees the marginal benefit of its actions in a different way than consumers do. Monopoly is inefficient because it prevents an economy from producing the mix of products that have the greatest possible value.

After a short examination of the theory of oligopoly, the readings explain how businesses can price discriminate and why this may eliminate the welfare loss due to monopoly. Finally, there is an examination of two ways—antitrust policy and regulation—that government can try to correct the problem of monopoly, with some of the second thoughts economists have had about these policies.

After you complete this unit, you should be able to:

  • Explain why a system with monopoly may be economically inefficient.
  • Define duopoly, contestable market, barriers to entry.
  • Explain why economics lacks a simple, complete theory of oligopoly.
  • Explain what two problems a business must overcome if it is to price discriminate.
  • Explain why a monopolist that price discriminates may produce the economically efficient amount of output.
  • Explain why economists argue that much regulation is sought by those regulated, not thrust upon them.
Copyright Robert Schenk