If the competitive market equilibrium maximizes market surpl

If the competitive market equilibrium maximizes market surplus, and monopolies result in some inefficiency (or deadweight loss), then why does the government allow monopolies to exist, and allow firms in some industries to have considerable monopoly power? ?

Solution

Monopolies cause deadweight loss still Government allow them to operate because of a no. Of reasons-

i) Monopoly has economies of scale i.e. increased output leads to reduction in average cost. This in some cases benefits consumers by passing the benefit from economies of scale to consumers by charging them lower price for greater level of output.

ii) Monopoly earns supernormal profit which gives firms confidence to take risks and fund high cost capital investment projects. Successful reasearch benefits the society in long run to obtain improved product quality and lower prices.

iii) Another advantage of monopoly is that it can use it\'s supernormal profit to subsidize and financially support loss making services which is useful for whole society.

iv) A firm may be a domestic monopoly causing DWL in domestic market, but monopoly firms face competitive pressure from abroad and related industries. With markets being increasingly globalized, it is beneficial for an overall economy to have domestic monopoly firms in order to be competitive internationally.