Market Structures: Monopoly, Monopolistic Competition, and Externalities

Posted on May 25, 2024 in Economy

Monopoly

Characteristics of Monopoly

  • Single seller
  • High barriers to entry
  • Market power to affect prices

Behavior of a Monopolist

  • Produces less output than a competitive firm
  • Charges a higher price than a competitive firm
  • Maximizes profit by setting MR = MC

Consequences of Monopoly

  • Deadweight loss
  • Higher prices for consumers
  • Reduced consumer choice

Monopolistic Competition

Characteristics of Monopolistic Competition

  • Many sellers
  • Differentiated products
  • Low barriers to entry

Behavior of a Monopolistically Competitive Firm

  • Produces where price = ATC in the long run
  • May earn profits in the short run
  • Faces a downward-sloping demand curve

Consequences of Monopolistic Competition

  • Some deadweight loss
  • Variety of products for consumers
  • Potential for innovation

Externalities

Positive Externalities

  • Benefits received by non-consumers or non-producers
  • Lead to under-provision of goods or services
  • Examples: education, public health

Negative Externalities

  • Costs imposed on non-consumers or non-producers
  • Lead to over-provision of goods or services
  • Examples: pollution, traffic congestion

Government Intervention

  • Pigouvian taxes to internalize negative externalities
  • Subsidies to internalize positive externalities
  • Regulations to limit negative externalities