The Cost of Inflated Prices and Insufficient Output

Our analysis has shown how imperfect competitors reduce output and raise price, thereby producing less than would be forthcoming in a perfectly competitive industry. This can be seen most clearly for monopoly, which is the most extreme version of imperfect competition. To see how and why monopoly keeps out putout low, imagine that all dollar votes are distributed properly and that all industries other than one are perfectly competitive, with Me equal to P and no externalities.

In this world, price is the correct economic standard or measure of scarcity: price measures both the marginal utility of consumption to households and the marginal cost of producing goods by firms.

Now Monopoly Inc. enters the picture. A monopolist is riot a wicked firm-it doesn’t rob people or force its goods down consumers’ throats. Rather, Monopoly Inc. exploits the fact that it is the sole seller of a good or service. By keeping its output a little scarce, Monopoly Inc. raises its price above marginal cost. Since P = Me is necessary for economic efficiency, the monopolist’S output will be less than the efficient output the marginal value of the good to consumers is therefore above its marginal cost. The same is true for oligopoly and monopolistic competition, as long as companies can hold prices above marginal cost.

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