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Market Imperfections - Monopolies

Monopolies: Discuss the following statements in Detail
a) are a good thing since they transfer resources from lower-valued to higher- valued activities thereby helping to maximize society's happiness?
b) are bad because they produce too little output; thereby decreasing society's happiness
c) a monopoly problem arises whenever Marginal Revenue (the change in Total revenue caused by an increase in output of one unit), is substantially less than Price at the firm's profit-maximizing level of output
d) Can government regulation fix (a), (b), and (c) above ? if so how, if not why?

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a. Some monopolies exist because of economies of scale. In this case, the monopoly is "natural" and is the best use of resources. However, monopolies are generally opposed because they take welfare from the public for themselves. We can't really argue therefore that they're taking resources from less-valued to more-valued purposes in all cases. We would first have to examine what the monopoly does with its excess profits. If it uses them for the good of society, then quite possibly the monopoly is doing no harm, and possibly good, depending on how wisely the public would have spent the money. Some of the profits would likely be distributed to shareholders as dividends. This would result in an income redistribution from the poor to the rich, because lower income ...

Solution Summary

Monopoly behavior and government intervention

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