Government-Created Monopoly and Bad Public Policy - Assignment Example

1. Define Natural Monopoly. What does the size of a market have to do with whether an industry is a natural monopoly?
A natural monopoly is a monopoly that experiences economies of scale along its intact range of production. Alternatively, a natural monopoly is the type of monopoly that experiences a decreasing average total cost (ATC).

Ideally, a small market is a natural monopoly. However, the market changes into a competitive market during the process of growth.
2. Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain.
In a monopolistic market, marginal revenue is always less than the price of goods. This is because monopolies have a downward-sloping demand curve. In fact, at any given price and quantity combination, a monopolist is required to reduce the prices of his commodities to sell an additional unit. This explains why a monopoly is a special market situation. Consequently, monopolies do not exhaust all available market opportunities.

B. In your opinion, which is the best market model and which is the worst? Please give examples to back up your thoughts.

Monopoly and perfectly competitive markets represent the two extremes in a market environment. In my own opinion, the perfectly competitive model is better than monopolies. This preference is based on economic aspects and market sustainability. In a perfectly competitive market, ultimate efficiency in the production and distribution of goods and services is achieved. Consequently, monopolies lack efficiency in their production and distribution of commodities. In a competitive market, producers and distributors of commodities are obliged to operate efficiently to remain relevant (Bade & Michael, 2002).

For example in perfect competition, producers reduce the prices of their commodities to increase their competitiveness. This in turn reflects on the production process where producers are forced to improve efficiency. On the other hand, monopolies have no immediate threats that would force them to reduce their prices or improve the quality of their products. Thus, a monopolistic market lacks efficiency. Lack of efficiency is mainly demonstrated through the production and distribution of goods within a market. In an ideal case, a market is supposed to have a natural mechanism that balances the distribution of commodities against the available customers.

Perfect competitive markets allow the mobility of resources. In this market, firms have the freedom to enter and exit the market. Products and firms that survive in such markets are sustainable and, hence a perfect measure for the economy. Consequently, monopolies lack sustainability since just a few firms make production and marketing decisions (Mankiw, 2011). In a monopoly, the entry of competitors is prohibited and therefore production sustainability cannot be achieved. For example, we cannot use market reports from a monopoly to measure the country’s economy. Consequently, market reports from a monopoly cannot be used to predict the economy. Thus, a perfectly competitive market is sustainable. Read More