Chapter 15: Monopoly (Level of difficulty 1 2/3)

Monopolies are considered to be market failures, where economic inefficiencies are likely to occur. A monopoly happens when there is a one and only seller in a market, unlike competitive markets where one single firm has little to no effect on the price of a good. This can be represented with a downward sloping curve that shows the demand for the product, where marginal revenue would always be below the price of the good. Just like when competitive firms try to maximize their profit, marginal cost and marginal revenue would be equal, but unlike the competitive firm, in a monopolistic situation the price will exceed the marginal cost. The profit maximum level of output would be below the level that is maximum sum of consumer and producer surplus. The deadweight losses created by monopolies are similar to those caused by taxes. Policymakers try to amend the inefficiencies caused by monopolies with antitrust laws, regulating certain prices, or making a government-run enterprise from that price controlling monopoly. Although there are possible solutions to inefficiencies caused by monopolies, if the market failure is considered to be small, then policymakers do nothing at all. Monopolies may raise profits by chagrining different prices to different consumers, depending on their willingness to pay for that product, the higher the willingness the higher the price, thus more cash-ing. Price discrimination can raise the economic welfare and help lessen deadweight losses, helping the economic well-being of the market.