AP Economics

1. AP Economics Mr. Bernstein Module 62: Monopoly and Public Policy December 4, 2013

2. AP EconomicsMr. Bernstein Monopolies vs. Perfect Competition • Qm < Qc • Pm > Pc • Monopoly p is > 0 • Generally bad for consumers and good for the firm • Is it bad for efficiency?

3. AP EconomicsMr. Bernstein Welfare Effects of a Monopoly

4. AP EconomicsMr. Bernstein Welfare Effects of a Monopoly • In Perfect Competition • There is no Producer Surplus • Total Surplus in the triangle above P=MC=ATC and below D • In Monopoly • The steeper MR curve means Qm is lower than Qc • Total Surplus is the area above MC=ATC and below MR and is less than in Perfect Competition • PS is now positive; this a transfer from consumer to firm • CS shrinks; part of area formerly CS now belongs to nobody • Deadweight loss is the area under D and between Qc and Qm…represents beneficial transactions that do not occur

5. AP EconomicsMr. Bernstein Preventing Monopoly Power • Antitrust Laws • Prevent formation of Monopoly via Mergers/Acquisitions or from ownership of critical resource input • Natural Monopolies exist from Economies of Scale • The ATC from one firm is lower than ATC from many competing firms • Example: Utilities • More efficient to allow and regulate • Government could purchase and operate where PC=MC but governments are not good at minimizing MC (!)

6. AP EconomicsMr. Bernstein Price Regulation

7. AP EconomicsMr. Bernstein Price Regulation Alternatives • Regulate to Perfect Competition Outcome • Output = QC, Price = PC, there is no DWL and CS is maximized • But loss is sustained - Utility would eventually go bankrupt • Regulate so firm earns economic profit • Output is OR, where PR = ATC • Some Deadweight Loss occurs, but less than with unregulated Monopoly • CS is larger than with unregulated Monopoly • Regulate to compromise between Perfect Outcome (best for consumer, bankrupts firm) and No Regulation (worst for consumer, incurs deadweight loss)