Posted at 08.10.2018
Keywords: definition of monopoly, monopolies benefits and drawbacks, effect of monopoloy
Natural monopolies are a main type of monopoly. Natural monopolies may occur because a service may have high predetermined cost attached with it is not profitable for a second firm to go into. Additionally, it may arise due to supply of physical area. For instance, the way to obtain gemstone in the western's world is principally handled by South Africa and in Trinidad and Tobago, WASA.
Disadvantages of Monopolies
Although consumers may reap the benefits of monopolistic firms, sometimes monopolies may misuse their vitality and exploit consumers. Some down sides of monopolies determined by Pearly are:
Monopolies have control over the entire market and could sell at higher prices by restrict supply of some goods and services which includes an inelastic demand. This brings about increase prices of products and services. This therefore can take advantage of the consumer.
Products have a tendency to be standardized and produced in higher quantities in monopolistic competition which restricts the decision of consumers. This restricts the liberty of consumers given that they can only buy goods and services available to them. Whereas if there is competition, there would have been variety of goods and services made available from competing organizations.
There are so many obstacles restricting competition. This induces inefficiency in monopolies since there are no bonuses for the coffee lover. Since there is no competition, monopolies do not produce at least cost. If there were competition, firms make an effort to keep cost down and improve quality of product which would benefit the customer. Therefore, monopolies are less successful than businesses where there is competition.
This shows that monopolies restrict result and raise prices so the monopolist takes benefit of society. Monopoly can be an inefficient structure since it passes cost to consumers. It is both allocatively and productively inefficient. It results in a damage to welfare of the world.
In monopolistic competition, there is price discrimination. Price discrimination serves as a the sales of the same product or services but are recharged differently matching to customer. For example, electricity rate for commercial use are higher than local use. Consumers whose demand is inelastic would pay a higher price. Therefore, consumers are exploited.
In final result, monopolies have a great deal of power. This power can benefit the consumer however in most cases abuse consumers. Therefore, the federal government formulates policies to prevent consumer from the misuse by monopolies. There are regulations such as creating more competition in monopolized industry, by regulating industry, take over monopolies, and avoiding the forming of monopolies.