Evaluation of Monopoly

Question 1

3 Advantages of Monopoly

Answer 1

1. Earning profits and wanting to remain dominant gives the monopoly ability and incentive to invest in product development and technological innovation
   - Technological innovation leads to lower costs
   - Product development leads to better products for consumers to benefit from
2. Lower costs through better innovation leads to lower prices
3. Large economies of scale leads to low costs which leads to lower prices and high quantities (comparable to perfect competition)

Question 2

5 Disadvantages of Monopoly

Answer 2

1. Does not achieve allocative efficiency
   
   • P (MB) ≠ MC (MB > MC, under allocation)
   • Welfare loss
   • Producer surplus > consumer surplus
2. Does not achieve productive efficiency and X-inefficiency exists
3. Produces low quantity at higher price, which is bad
   for consumers (shown through loss of consumer
   surplus)
4. Monopoly might not feel the need to develop
   product if barriers to entry exist already
5. Economies of scale acts as an entry barrier
   * Most economists believe monopoly when left unregulated have more disadvantages than they have advantages

Question 3

X-Inefficiency

Answer 3

X-inefficiency happens when a lack of effective/real competition in a market or industry leads to average costs being higher than they would be with competition