Why Is Monopolies Harmful And How Can Regulation Ameliorate These Harm

Why Is Monopolies Harmful and How Can Regulation Ameliorate These Harmful

Effects?

Why is monopoly ‘harmful? How can regulation ameliorate these harmful effects?

What problems confront the regulators?

In order to deduce that a monopoly is ‘harmful', there must be another market system which is preferable to monopoly so as to offer greater benefits to the public. A monopoly can therefore be compared to perfect competition. If the benefits of perfect competition outweigh the benefits of monopoly then a monopoly can be regarded as ‘harmful' since the consumers are not receiving the maximum possible utility for their purchases.

Monopolies are criticised for their high prices, high profits and insensitivity to the public. Some governments therefore, in the light of these protests, advocate policies relating to monopolies, in order to regulate their power in favour of the public's interest.

There are several reasons why monopolies may be against the public interest. It is claimed that monopolies produce at a lower level output and charge a higher price than under perfect competition in both the short run and the long run.

Consider the diagram above. Assume that this monopolist attempts to maximise profits. Equating MC=MR yields an output of Qm and a price of Pm. If the same industry existed under perfect competition however, the price would be Ppc and output would be Qpc since under perfect competition P=MC=AR. The price in such a situation would thus be lower than under monopoly and output would be greater.

Consumers obviously benefit if this is the case since P=MC implies P=Marginal utility so that consumers are maximising their total utility(Under monopoly P>MC and therefore arguably, not the optimum).

In the long run under monopoly, supernormal profits persist. Under perfect competition complete freedom of entry leads to the elimination of these profits and forces firms to produce at the bottom of the long run average cost curve.

Under monopoly however, there are barriers to entry so as to prevent new firms from entering the industry and reducing the monopolist's profits to the normal level. Higher prices and lower output thus continue to persist in the long run.

Due to lack of competition, it is argued, a monopolist has no incentive to develop new techniques in order to survive. A monopolist can therefore make supernormal profits without using the most efficient techniques. Under perfect competition, in order for firms to survive, the most efficient techniques must be adopted or developed whenever possible or else the firm which fails to do so will be forced to shutdown. This argument leads to the conclusion that monopolies have higher cost curves than firms under perfect competition(Assuming