Monopoly output, welfare and efficiency
| English | 中文 | Pinyin |
|---|---|---|
| monopoly power/məˈnɒpəli ˈpaʊə/ | 垄断势力 | lǒng duàn shì lì |
| welfare loss | 福利损失 | fú lì sǔn shī |
| economic profit/ˌiːkəˈnɒmɪk ˈprɒfɪt/ | 经济利润 | jīng jì lì rùn |
A decision you can investigate
- A sole supplier can influence price, but customers still buy less when its price rises. It cannot choose price and sales independently.
- Market power does not guarantee profit or remove demand constraints.
Build the explanation
- The pure monopoly model has one supplier in the defined market, no close substitutes and barriers protecting its position. Market definition and alternatives matter; a large firm is not automatically a monopoly. Barriers may involve scale advantages, protected technology, exclusive resources, branding, licences or sunk entry/exit costs. The monopolist faces market demand as AR and has MR below price under uniform pricing. It chooses feasible output where MR=MC at a profit maximum, then reads price from demand; it does not set P=MC as its profit rule.
- Restricted output and a price markup can transfer surplus to the firm and reduce allocative efficiency in a no-externality benchmark. Scale can lower costs, and profits may fund research or better service; weak rivalry may instead permit X-inefficiency or slow innovation. Productive and dynamic efficiency need evidence of attainable cost and actual improvements. Consumers may gain reliable integrated provision or lose choice, surplus and access; neither outcome follows from ownership alone.
Work through the evidence
- A fictional monopoly has P=100−Q, MR=100−2Q and TC=200+20Q, including the required normal return. MR=MC20 gives Q40, price60, TR2400, TC1000 and economic profit1400. Consumer surplus=0.5×(100−60)×40=800.
- The same-demand marginal-benefit/MC benchmark gives Q80 and price20. The unproduced net benefit between40 and80 is0.5×40×40=800. Fixed cost200 is unchanged between these two output comparisons, so net welfare rises2200→3000 if the extra output can be financed and delivered. However, selling all80 at price20 gives revenue1600 against cost1800: marginal-cost pricing does not cover fixed cost200. This is an allocative benchmark, not an automatic viable competitive long-run outcome. At Q40, AC25 exceeds MC20; profit is calculated from TR−TC, not from the price/MC margin alone. AC falls to22.5 at Q80, showing further scale-cost reductions in this toy schedule, not a universal monopoly result; demand and finance still need evaluation.
What is monopoly output?
100−2Q=20 gives Q40.
What is the stated welfare loss?
Triangle0.5×output gap40×marginal value gap40 equals800.
A monopolist can choose any price and any sales volume independently.
Demand links price with the quantity customers are willing and able to buy.
Test the limits
- The welfare triangle assumes unchanged demand/cost, no external effects and feasible extra output. It measures lost net benefit, not all monopoly profit or a transfer between consumers and owners. This particular fixed-cost schedule has declining AC; it does not imply every monopoly has that technology.
- Monopoly can make losses if demand is weak or costs high. Entry barriers can protect research incentives yet obstruct new ideas; profits alone do not prove dynamic efficiency. Compare alternatives, resource costs, quality, innovation and regulation. Social cost/benefit and equity may alter the evaluation. A monopoly’s supply choice depends on demand and MR, so it has no unique demand-independent supply curve like a competitive firm’s standard marginal-cost segment.
Why does price20 fail to finance the benchmark output80 here?
Fixed cost200 remains despite P=MC.
Apply and explain your answer
- Why is economic profit1400 rather than the price/MC margin40 times quantity40?
- The margin covers1600 before fixed cost. Subtract fixed economic cost200 to obtain1400.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- monopoly power 垄断势力: Ability to influence price in a defined market, constrained by demand and alternatives.
- welfare loss 福利损失: Forgone net social benefit relative to a specified feasible benchmark.
- economic profit 经济利润: Revenue less all economic costs, including normal returns.
A fictional monopoly has P=100−Q, MR=100−2Q and TC=200+20Q, including the required normal return. MR=MC20 gives Q40, price60, TR2400, TC1000 and economic profit1400. Consumer surplus=0.5×(100−60)×40=800. The same-demand marginal-benefit/MC benchmark gives Q80 and price20. The unproduced net benefit between40 and80 is0.5×40×40=800. Fixed cost200 is unchanged between these two output comparisons, so net welfare rises2200→3000 if the extra output can be financed and delivered. However, selling all80 at price20 gives revenue1600 against cost1800: marginal-cost pricing does not cover fixed cost200. This is an allocative benchmark, not an automatic viable competitive long-run outcome. At Q40, AC25 exceeds MC20; profit is calculated from TR−TC, not from the price/MC margin alone. AC falls to22.5 at Q80, showing further scale-cost reductions in this toy schedule, not a universal monopoly result; demand and finance still need evaluation.
The welfare triangle assumes unchanged demand/cost, no external effects and feasible extra output. It measures lost net benefit, not all monopoly profit or a transfer between consumers and owners. This particular fixed-cost schedule has declining AC; it does not imply every monopoly has that technology. Monopoly can make losses if demand is weak or costs high. Entry barriers can protect research incentives yet obstruct new ideas; profits alone do not prove dynamic efficiency. Compare alternatives, resource costs, quality, innovation and regulation. Social cost/benefit and equity may alter the evaluation. A monopoly’s supply choice depends on demand and MR, so it has no unique demand-independent supply curve like a competitive firm’s standard marginal-cost segment.
The pure monopoly model has one supplier in the defined market, no close substitutes and barriers protecting its position. Market definition and alternatives matter; a large firm is not automatically a monopoly. Barriers may involve scale advantages, protected technology, exclusive resources, branding, licences or sunk entry/exit costs. The monopolist faces market demand as AR and has MR below price under uniform pricing. It chooses feasible output where MR=MC at a profit maximum, then reads price from demand; it does not set P=MC as its profit rule.