Point out to students that this is similar to the analysis of taxes in Chapter 8. Here, the monopolist places a wedge between price and marginal cost and the quantity sold ends up being short of the optimum level.
Chapter 15/Monopoly 41B.The Monopoly's Profit: A Social Cost?1.Welfare in a market includes the welfare of both consumers and producers.2.The transfer of surplus from consumers to producers is therefore not a social loss.3.The deadweight loss from monopoly stems from the fact that monopolies produce less than the socially efficient level of output.4.If the monopoly incurs costs to maintain (or create) its monopoly power, those costs would also be included in deadweight loss.V.Public Policies toward MonopoliesA.Increasing Competition with Antitrust Laws1.Antitrust laws are a collection of statutes that give the government the authority to control markets and promote competition.a.The Sherman Antitrust Act was passed in 1890 to lower the market power of the large and powerful "trusts” that were viewed as dominating the economy at that time.b.The Clayton Act was passed in 1914; it strengthened the government's ability to curb monopoly power and authorized private lawsuits.2.Antitrust laws allow the government to prevent mergers and break up large, dominating companies.3.Antitrust laws also impose costs on society. Some mergers may providesynergies, which occur when the costs of operations fall because of joint operations.B.Regulation1.Regulation is often used when the government is dealing with a naturalmonopoly.2.Most often, regulation involves government limits on the price of the product.3.While we might believe that the government can eliminate the deadweight loss from monopoly by setting the monopolist's price equalto its marginal cost, this is often difficult to do.Figure 9Local phone and electric companies are good examples of regulated monopoly firms.
42 Chapter 15/Monopolya.If the firm is a natural monopoly, its average total cost curve will be declining because of its economies of scale.b.When average total cost is falling, marginal cost must be lower than average total cost.c.Therefore, if the government sets price equal to marginal cost, the price will be below average total cost and the firm will earn a loss, causing the firm to eventually leave the market.4.Therefore, governments may choose to set the price of the monopolist's product equal to its average total cost. This gives the monopoly zero profit, but assures that it will remain in the market.