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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Abuse of monopoly power

Syllabus: Explain how monopoly power can create a welfare loss and is therefore a type of market failure.

monopoly02A most important assumption of the ideal free market economy is that markets within it are competitive, so that a large number of competing firms passively take the price that is set in the market as a whole and either increase or decrease their output in response to shifts in consumer demand.

However, as we saw in the section on monopoly, markets may be dominated by a single producer of the good or service, in which case a situation of monopoly exists, or by a few producers, in which case an oligopoly exists. In either situation, producers may not be content to take a price set in the market. Having significant control over supply, firms in pursuit of maximum profits may attempt to make the market price higher than it would otherwise have been by restricting output. The outcome for consumers may therefore be that they are paying a higher price for a smaller output. This would represent market failure and a misallocation of society's scarce resources, as the economy would be deprived of some of the output which would be valued more highly than that currently being consumed.

Also, in a situation of monopoly or oligopoly, profits may not perform the function that they are supposed to in the 'ideal' free market situation. Here, the making of profit is deemed to be a sign of efficiency; that is, the goods that are being produced are precisely those that consumers want and of a suitably high quality, and because firms cannot influence price, the profit has been achieved by operating efficiently, with costs being kept below the ruling price. However, given the power of firms in monopoly and oligopoly to restrict output to keep price artificially high, the making of profits may reflect market power and dominance rather than efficiency. Monopoly may involve both allocative and technical inefficiency. Refer back to the section on monopoly and re-read the course notes if you are not sure about this.