8. Can a monopolist that is not subject to any regulation lead the market to Pareto efficiency by his own initiative? Pareto efficiency is a situation that cannot be modified so as to make any one individual better off without making at least one individual worse off. In the model of monopoly, we assume that the ultimate goal of a monopolist is to maximize his profit, which means MC-MR. We have seen (for example, in the lecture or earlier problems, e.g., problem 5) that this equality leads the monopolist to produce less and charge a higher price than in perfect competition. This makes the monopolist better off but at the same time makes consumers worse off, as compared to perfect competition. This also leads to a deadweight loss. As we have the deadweight loss, the monopoly is definitely not Pareto efficient. See the lecture slide # 37. The transactions between Qm and Qk (quantities supplied in the monopoly and perfect competition, respectively) could take place to everyone's benefit, as the cost of the production is lower than the maximum willingness to pay of consumers for the good (given by the demand function). So we could think about improvement of the situation from the monopoly (making the transactions between Qm and Qk happen), but the monopolist will not do that by his own initiative because he produces so as to maximize his profit, so MR = MC.
8. Can a monopolist that is not subject to any regulation lead the market to Pareto efficiency by his own initiative? Pareto efficiency is a situation that cannot be modified so as to make any one individual better off without making at least one individual worse off. In the model of monopoly, we assume that the ultimate goal of a monopolist is to maximize his profit, which means MC-MR. We have seen (for example, in the lecture or earlier problems, e.g., problem 5) that this equality leads the monopolist to produce less and charge a higher price than in perfect competition. This makes the monopolist better off but at the same time makes consumers worse off, as compared to perfect competition. This also leads to a deadweight loss. As we have the deadweight loss, the monopoly is definitely not Pareto efficient. See the lecture slide # 37. The transactions between Qm and Qk (quantities supplied in the monopoly and perfect competition, respectively) could take place to everyone's benefit, as the cost of the production is lower than the maximum willingness to pay of consumers for the good (given by the demand function). So we could think about improvement of the situation from the monopoly (making the transactions between Qm and Qk happen), but the monopolist will not do that by his own initiative because he produces so as to maximize his profit, so MR = MC.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:8. Can a monopolist that is not subject to any regulation lead the market to Pareto efficiency by
his own initiative?
Pareto efficiency is a situation that cannot be modified so as to make any one individual better off
without making at least one individual worse off.
In the model of monopoly, we assume that the ultimate goal of a monopolist is to maximize his
profit, which means MC-MR. We have seen (for example, in the lecture or earlier problems, e.g.,
problem 5) that this equality leads the monopolist to produce less and charge a higher price than
in perfect competition. This makes the monopolist better off but at the same time makes
consumers worse off, as compared to perfect competition. This also leads to a deadweight loss.
As we have the deadweight loss, the monopoly is definitely not Pareto efficient. See the lecture
slide # 37. The transactions between Qm and Qk (quantities supplied in the monopoly and perfect
competition, respectively) could take place to everyone's benefit, as the cost of the production is
lower than the maximum willingness to pay of consumers for the good (given by the demand
function). So we could think about improvement of the situation from the monopoly (making the
transactions between Qm and Qk happen), but the monopolist will not do that by his own initiative
because he produces so as to maximize his profit, so MR = MC.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 3 images
Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education