Principles of Economics- Mankiw (5th) 320

Principles of Economics- Mankiw (5th) 320 - 330 PA R T F I...

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330 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY THE MONOPOLY’S PROFIT: A SOCIAL COST? It is tempting to decry monopolies for “profiteering” at the expense of the public. And, indeed, a monopoly firm does earn a higher profit by virtue of its market power. According to the economic analysis of monopoly, however, the firm’s profit is not in itself necessarily a problem for society. Welfare in a monopolized market, like all markets, includes the welfare of both consumers and producers. Whenever a consumer pays an extra dollar to a producer because of a monopoly price, the consumer is worse off by a dollar, and the producer is better off by the same amount. This transfer from the consumers of the good to the owners of the monopoly does not affect the market’s total surplus—the sum of con- sumer and producer surplus. In other words, the monopoly profit itself does not represent a shrinkage in the size of the economic pie; it merely represents a bigger slice for producers and a smaller slice for consumers. Unless consumers are for some
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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