Why Is Monopolies Harmful and How Can Regulation Ameliorate These Harmful
Effects?
Why is monopoly ?harmful? How can regulation ameliorate these harmful effects?
What problems confront the regulators?
In order to deduce that a monopoly is ?harmful', there must be another market
system which is preferable to monopoly so as to offer greater benefits to the
public. A monopoly can therefore be compared to perfect competition. If the
benefits of perfect competition outweigh the benefits of monopoly then a
monopoly can be regarded as ?harmful' since the consumers are not receiving the
maximum possible utility for their purchases.
Monopolies are criticised for their high prices, high profits and insensitivity
to the public. Some governments therefore, in the light of these protests,
advocate policies relating to monopolies, in order to regulate their power in
favour of the public's interest.
There are several reasons why monopolies may be against the public interest. It
is claimed that monopolies produce at a lower level output and charge a higher
price than under perfect competition in both the short run and the long run.
Consider the diagram above. Assume that this monopolist attempts to maximise
profits. Equating MC=MR yields an output of Qm and a price of Pm. If the same
industry existed under perfect competition however, the price would be Ppc and
output would be Qpc since under perfect competition P=MC=AR. The price in such a
situation would thus be lower than under monopoly and output would be greater.
Consumers obviously benefit if this is the case since P=MC implies P=Marginal
utility so that consumers are maximising their total utility(Under monopoly P>MC
and th ...