Costs of Monopoly

A monopolist produces less output and sells it at a higher price than a perfectly competitive firm. The monopolist's behavior is costly to the consumers who demand the monopolist's output. The cost of monopoly that is borne by consumers is illustrated in Figure . The firm's marginal cost curve is drawn as a horizontal line at the market price of $5.

In a perfectly competitive market, the firm's marginal revenue curve is also equal to the market price of $5. Therefore, total output in a perfectly competitive market will be 5 units. In a monopolistic market, however, marginal revenue and marginal cost intersect at 3 units of output. The monopolist sells its output at $7 per unit—the price on the market demand curve that corresponds to 3 units of output.

The cost to the consumer of a monopolistic market structure is the reduction in consumer surplus that results from monopoly output and price decisions. Under perfect competition, consumer surplus is given by the area of triangle, abd, in Figure . Under monopoly, this consumer surplus is reduced by the area of the trapezoid, fedb. Of this amount, the amount represented by fecb, now accrues to the monopolist; edc is the deadweight loss resulting from the monopolist charging a higher, inefficient price. Consumer losses from monopolistic markets have resulted in legal efforts to break up monopolies and government regulation of natural monopolies.

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