1) The document discusses the characteristics and efficiency arguments for and against monopoly. 2) It analyzes the case against monopoly in terms of allocative and productive inefficiency, and loss of economic welfare. 3) The case for monopoly is discussed in terms of dynamic efficiency, productive efficiency from economies of scale, and how some industries are natural monopolies where competition would increase costs.

1. Objectives:
By the end of this section you should be able to:
1) State the characteristics of Monopoly
2) Draw the monopoly diagram
3) Explain how Monopolies exist in the long run
4) Analyse the case against Monopoly (using efficiency arguments)
5) Analyse the case for Monopoly (using efficiency arguments)

2. Efficient Market Structure
An efficient market structure is allocatively efficient (P=MC) and
productively efficient (produce at the lowest point on the AC curve
Revenue/
costs
MC
1) Firms are price
LRAC
P
D=MR=AR
takers, they face
a perfectly elastic
demand curve
2) No abnormal profits
can be made because of
perfect knowledge, so
no incentive of
firms in and
out of the industry
3) Long run equilibrium
is established
4) AC=AR=MR=MC
Output

3. Price
The case against monopoly
Price is higher (Pm) than
MC it would be in a
competitive market (P*)
where price would equal
to MC.
Pm
Output is lower (Q) than
it would be in a
competitive market (Q*)
P*
The result is allocative
inefficiency and a loss of
economic welfare
D=AR
Q
MR
Q*
Output

4. Price
The case against monopoly
Unit cost is higher
(C) than it would
MC
be in a
competitive
AC
market (C*)
where only normal
profit would be
made in the long
run
Pm
C
C*
D=AR
Q
MR
Q*
Output
The result is
productive
inefficiency

5. The case against monopoly
Allocative inefficieny – P greater than MC
Productive inefficiency
Exploit customers
Loss of consumer surplus
Managerial slack
Stagnates economic growth
Waste of economic resources
Dynamic inefficiencies

6. The case against monopoly: BAA
BAA airport ownership criticised
BAA break-up order expected
Ryanair boss says he 'welcomes' BAA ruling
BAA agrees Gatwick airport sale
BAA: Airport sale ruling 'draconian'
Watch the following video clips, take some notes and
then have a go at the data response question on BAA

7. DISCUSSION: Is there a case for monopoly?
Dynamic efficiency
Productive efficiency
Economies of Scale
International trade
ESSAY TASK:
Discuss the extent to which the monopoly provision of transport
services is beneficial to producers and consumers. [20]

9. DEFINITION: Where a monopolist has overwhelming cost advantage
FACTS:
Occurs when one large business can supply the entire market at a
lower price than two or more smaller ones
There cannot be more than one efficient provider of a good. In this
situation, competition might actually increase costs and prices
There is room for only one firm to fully exploit all of the available
internal economies of scale
An industry where the long run average cost curve falls continuously
as output expands

10. Railtrack is considered to be a natural monopoly – associated with enormous economies of
scale, 21,000 miles of rail lines, tunnels, bridges, level crossings, stations, signals etc.
The very high costs of laying track and building a network, as well as the costs of buying or
leasing the trains, would prohibit, or deter, the entry of a competitor
In 1996, Railtrack was privatised but by 2001 it was bankrupt with debts of £3.3 billion and
making an operating loss of £534 million.
It was taken back into Government control and is operated as a ‘not for profit’ organisation
Network Rail
National Rail runs the network – but train operating companies have to bid for the franchise
to run passenger services – and the industry regulator can take their franchise away if the
quality of service isn’t good enough
To society, the costs associated with building and running a rival network would be wasteful

11. Falling LRAC curve due to continuing economies of scale
Price
Monopolist would operate where MC=MR and charge
Pm, provide Qm output and make abnormal profits
Pm
In an efficient market price would be set at Pc and
provide output Q2, where P=MC, however this is a loss
making position
Output beyond Qm is required
The monopoly therefore has to be subsidised on the
grounds that what it is providing is an essential public
service
X
AC
Pc
D=AR
MR
Qm
Q2
Output
MC