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 therefore arguably, not the optimum).
In the long run under monopoly, supernormal profits persist. Under perfect competition complete freedom of entry leads to the elimination of these profits and forces firms to produce at the bottom of the long run average cost curve. Under monopoly...