Explain whether monopolies are efficient or not

Question 1

KAA1

Answer 1

A monopolist maximises profit where MC = MR, not where P = MC → Price is set above marginal cost → Underproduction compared to the socially optimal level → Causes allocative inefficiency and deadweight welfare loss → Consumers face higher prices, lower output, and restricted choice.

Chain of reasoning (→ arrows):
Monopoly power ↑ → P > MC → Allocative inefficiency ↑ → Deadweight loss ↑ → Consumers face higher prices and lower quantity → Consumer surplus ↓.

✅ Stakeholder Focus:

Consumers: Pay higher prices and get less choice.

✅ Real-life Application:

British Gas (energy monopoly segments) and Google (online search dominance) have faced accusations of consumer exploitation through high prices and restricted competition.

Ofgem found UK energy firms earned supernormal profits while households struggled with bills in 2022–23.

📈 Diagram Suggestion:

Monopoly diagram:

Downward-sloping AR (demand) and MR curves.

Profit maximisation where MC = MR.

Price above MC at quantity Qm.

Highlight welfare loss triangle.

Question 2

Eval1

Answer 2

If the monopolist faces contestable market pressure (threat of new entrants) → It may behave more competitively → Keep prices lower and output higher → X-inefficiency reduced → Consumer outcomes not as bad as pure monopoly theory predicts.

✅ Real-life Application:

Amazon in retail: dominant but still offers low prices partly because of constant threat from competitors like Walmart, eBay, Alibaba.

✅ Other Stakeholders Affected:

Government: Gains corporation tax revenue from high monopoly profits.

Small firms: Struggle to enter but contestability can keep monopolies disciplined.

Question 3

KAA2

Answer 3

A monopolist operating on a large scale can exploit economies of scale → Average costs fall as output increases → Lower production costs → In theory, this could lead to productive efficiency if savings are passed onto consumers or reinvested → Monopolies may achieve lower long-run average costs than many small firms.

Chain of reasoning (→ arrows):
Monopoly scale ↑ → Economies of scale ↑ → Average costs ↓ → Potential productive efficiency ↑ → Possible lower prices if cost savings are shared.

✅ Stakeholder Focus:

Producers (Firms): Benefit from lower average costs and larger production scale.

✅ Real-life Application:

National Grid in electricity transmission is a natural monopoly: only one set of infrastructure needed, meaning very high fixed costs but huge economies of scale → More efficient than duplicating networks.

📈 Diagram Suggestion:

Long-Run Average Cost (LRAC) curve:

Show economies of scale (downward-sloping section) → Monopoly at lower AC than multiple small firms.

Question 4

Eval 2

Answer 4

Monopolists may suffer from X-inefficiency because lack of competition reduces pressure to minimise costs → Organisational slack and wasteful spending can occur → Average costs rise compared to a competitive industry.

✅ Real-life Application:

Ofcom fined BT in 2023 for failing to invest efficiently in Openreach (broadband infrastructure), suggesting monopoly inefficiency despite large scale.

✅ Other Stakeholders Affected:

Consumers: May face higher prices if cost savings aren’t passed on.

Government: May need to regulate monopolies to ensure efficiency.