THE WELFARE COST OF MONOPOLY

Is monopoly a good way to organize a market?·We have seen that a monopoly, in contrast to a competitive firm, charges a price above marginal cost. From the stans point of consumers, this high price makes monopoly undesirable. At the same time, however, the monopoly is earning profit from charging this high price. From the standpoint of the owners of the firm, the high price makes monopoly very desirable. Is it possible that the benefits to the firm’s owners exceed the costs imposed on consumers, making monopoly.

Desirable from the standpoint of society as a whole? We can answer. this question using the tools of welfare economics. Recall from Chapter 7 that total surplus measures the economic ‘well-being of buyers and sellers in- a market. Total surplus is the sum of consumer surplus and producer surplus. Consumer surplus is consumers’ willingness to pay for a good minus the amount they actually pay for it. Producer surplus is the amount producers receive for a good minus their costs of producing it. In this case, there is a single.producer-the monopolist.

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