Microeconomics Question from Walter E. Williams:Edit

Economists sometimes say that monopoly is "inefficient". Explain the meaning of "inefficiency" in this context. Show analytically how this inefficiency comes about.


There are two senses of inefficiency:


Graph showing what mainstream economists call monopolistic inefficiency.

(i) Efficiency loss: Here "inefficiency" means that there remain unrealized gains from further production and exchange since consumers value the non-produced goods more than what it costs the monopolist to make those goods (i.e., P > MC). The efficiency loss is the area that includes lost consumer and producer surplus. See the graph. (H&H Section 8.2)
(ii) Costs of rent-seeking: This inefficiency captures the costs of pursuing and maintaining a government-granted monopoly privilege. As a result of artificial barriers to entry, would-be entrants divert in other markets where the goods they produce are valued less than the good produced by the protected monopoly. (H&H Section 8.2; Alchian pg. 155.) Examples of artificial barriers include import tariffs, immigration restrictions, licensing laws, etc.

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