Prepared by A. K. Klevor
"Monopoly is good for producers but bad for consumers. The gains of the former offset the losses of the latter. On balance, there is no reason to think that monopoly is bad for the economy." Evaluate.
The statement “monopoly is good for producers but bad for consumers” is usually made because through the activities of the monopoly part of the wealth of the consumer is lost to the consumer. This statement is evaluated using the economic welfare of both the monopolist and the consumer. The economic welfare of both monopolist and consumer is measured by the producer surplus of the monopolist and consumer surplus of the consumer.
The producer surplus is the amount a seller is paid for a product minus the total variable cost of production and is equivalent to the economic profit (wealth) in the long run. The consumer surplus is the amount a buyer is willing to pay for a product minus the amount the buyer actually pays and is equivalent to the savings (wealth) of the consumer in the long run. It is the area below the demand curve and above the market price. A lower market price will increase consumer surplus and a higher market price will reduce consumer surplus.
Economic welfare can be quantified as the sum of consumer surplus and producer surplus, i.e. equal weights assumed. The diagram below demonstrates the consumer and producer surpluses and economic welfare. The producer surplus is the area below the equilibrium price and bordered by the price axis and the supply curve while the consumer surplus is the area above the equilibrium price and bordered by the price axis and demand curve.
The diagram above also shows both allocative and productive efficiencies. At equilibrium, both the consumer and producer allocate all resources efficiently and there is effective and efficient production of goods and services.
However, the activities of the monopolist disturb these levels of...