‘Bad is not always bad, good is not always good’ Apply this statement in relation

to a monopoly. [25]

A monopoly is believed to have binary good and bad qualities; that is to say that
the bad qualities are strictly bad while the good qualities are strictly good. The
statement posits that this may not be the case; that the good qualities may have
bad consequences, and vice versa. By examining both the good and bad
qualities of a monopoly, this essay will seek to elucidate the statement.

One factor in favour of monopolies is the presence of Economies of Scale (EOS).

These are cost savings arising from an expansion of a firm. In the case of a
monopoly, output is maximised and the cost savings can therefore be passed on
to consumers, thus increasing output while at the same time decreasing prices.
Even when the firm uses its market power to set prices at its profit max point
MC=MR, this increases the welfare of the consumers more as compared to
perfect competition, as illustrated by fig.1

Fig.1

However, as the statement suggests, this is not always true. As seen from fig.2.
The internal EOS is smaller than the exploitative nature of the monopolist which
produces at MC=MR (profit max point)

Fig.2
Another argument for monopoly is the natural monopoly argument. This states
that it will be more cost effective to have one and only one firm operating within
a certain industry due to the prohibitively high start up costs which require the
economies of scale afforded to a very large firm to offset. For example, setting
up the Mass Rapid Transit system (MRT) in Singapore requires very large
infrastructural spending and it will also not be feasible to have overlapping lines,
especially due to space constraints in Singapore. In this case, a natural monopoly
is best suited for the industry as it is most efficient, and without it there might
even be a “missing market”. The benefits of a natural monopoly is illustrated by
fig 3

Fig. 3

However, if output falls to point c (perhaps due to a miscalculation of estimated

demand), LRAC will increase to point c and the firm will earn subnormal profits.
This might cause the firm to leave the industry, which could be disastrous to the
country’s economy, such as if the MRT in Singapore were closed, or might force a
government takeover, which can be often subjected to inexpertise and
bureaucracy. Therefore, a natural monopoly is not always ideal for a country; a
few large firms might better serve that purpose.

The ability to conduct research and development (R&D) in order to produce

better quality products is a factor in the favour of monopolies. Using the
supernormal profits that the firm derives from maximising profit, consumers can
get better quality products perhaps at even lower prices because of the
innovation that is undertaken by firms. For example, a television company such
as Samsung can use its supernormal profits to create new products such as a 3-
D television.

However, R&D is only undertaken by producers of consumer variables, such as

televisions on MP3 players. Consumer expendables such as electricity have a
captive market which produces recurrent demand; ie demand does not cease
upon purchase of the product. For these monopolies, R&D does not hold true and
the statement is right in saying that “good is not always good”
On the other hand are the bad aspects of a monopoly. One is that monopolies do
not achieve Minimum Efficient Scale (MES) This is due to the profit-maximising
behaviour of monopolies in that they produce at MC=MR as illustrated by fig. 4.
This results in loss of consumer welfare as the potential savings are not passed
to the consumers in the form of lower prices.

Fig.4

If MES corresponds with the profit max point MC=MR, then this negative aspect
of monopoly is then invalid since the monopoly does achieve MES. Therefore
“bad need not be bad” if the monopoly’s MES does indeed correspond with the
profit max point MC=MR as illustrated by fig.5

Fig.5

Allocative inefficiency is also a negative consequence of monopoly power. This

can be seen from fig.4 where producing at MC=MR leads to a welfare loss.