Econ 201 Lecture 18 Does the fact that perfect competition is socially efficient and monopoly is not mean that we should outlaw monopoly? Suppose the monopoly in question is the result of a patent that prevents all but one firm from manufacturing a highly valued product. Would we be better off without patents? Alternatively, suppose the monopolist is a natural monopolist. Price($/minute)ACMCMinutes(millions/day)Efficiency requires P=MC But if MC<AC, setting P=MC means losing money Price($/minute)0.08ACMCEconomic loss= -$600,000/dayMR20Minutes(millions/day)D0.05P =It is better for a natural monopolist to maximize profit and stay in business than to charge MC and go out of business. Price($/minute)0.08ACMCEconomic profit= $400,000/day0.10MR20Minutes(millions/day)D0.050.15Consumer surplus= $500,000/dayThe efficiency loss from single-price natural monopoly stems from the fact that the profit-maximizing price is above marginal cost, thereby excluding many buyers who "should" be in the market (because they are willing to pay a price greater than or equal to marginal cost).
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