Monopoly

A monopoly is a market structure characterised by a single seller producing a unique product in the market.
In a monopoly, the single business becomes the industry, with complete control over the market supply.

Characteristics of Monopoly

Single seller: A monopoly market consists of a single business which is the sole producer of a product or service.
Unique product: The product or service provided by the monopolist is unique. There are no close substitutes available.
Price maker: The monopolist can set the price due to lack of competition. The monopolist often charges a price above marginal cost.
High barriers to entry: These can be economic, legal or technological which prevent other businesses from entering the market.

Formation of Monopoly

Monopolies can form due to reasons like, ownership of exclusive resources, patents and copyrights, government legislation and regulations, and through achieving economies of scale which create a natural monopoly.

Impacts of Monopoly

Potential for high prices and lower output: As monopolists can set the price, they may charge consumers a high price and restrict output to maximise profits.
Consumer surplus is diminished: The monopolist can appropriate the consumer surplus by charging a high price.
Inefficiency: Lack of competition could mean that monopolies do not have any incentive to operate efficiently.
Monopolies may have to invest in innovation and R&D to maintain their market power.

Evaluation of Monopoly

Monopolies may not always act against consumers’ interests. Some monopolies, like natural monopolies, may arise due to efficiency. The firm can provide the good or service at a lower cost due to economies of scale.
Productive efficiency may be achieved as most monopolies have large-scale operations.
Monopolies can be regulated by the government to protect consumers’ interests.

Monopoly and Market Failure

Monopolies may lead to market failure due to factors like allocative inefficiency (incorrect allocation of resources), x-inefficiency (production at higher costs due to lack of competitive pressure) and equity issues (due to possible high prices and restricted access).
However, they can also contribute positively to the economy through innovation and potential for economic growth.

In conclusion, monopolies are a complex market structure which can pose challenges but also offer opportunities for efficiency. Understanding monopolies is crucial to comprehend the dynamics of different market structures and their implications on resource allocation.