What is a monopoly?

• What is a monopoly?:

  • A monopoly occurs when there is only one producer in an industry​
• • This provides the monopolist with market power  leading to higher prices and abnormal profits.  Monopoly power is the ability of a firm to set prices.  ​
• • Monopolies can exploit consumers by charging high prices.  Therefore, monopolies are regulated in order to protect the customer.​
• In a monopoly there are no close substitutes and high barriers to entry
• How does a monopoly lead to market failure:

  • Allocative inefficiency due to charging high prices and restricting output
  • This leads to a misallocation of resources which leads to market failure
• How does a monopoly lead to market failure:


  • Allocative inefficiency due to charging high prices and restricting output
  • This leads to a misallocation of resources which leads to market failure
• Where is a monopoly allocatively efficient?

  MC=AR
• Why happens when a monopoly restricts output leading to market failure?

  Output is restricted below the point of allocative efficiency which leads to underproduction and welfare loss