In economics, monopoly is a state of the market where there is only a single firm providing certain goods and services. The main reason for monopolies to exist is an apparent lack of competition in the industry. While in the past there were a large number of cases where monopolies exist, in the present, most of them has been restricted by the Competition law. There must be reasons why monopolies are considered “a threat” while competitions are defined as “perfect” (W. G. Shepherd, “public policies towards businesses readings and cases”, 1975, p2). Therefore, this essay will discuss the effects of monopolies towards the economy and welfare and whether the anti-monopolistic practices are actually bringing more aid than harm.
As far as resource allocation is concerned, there are 3 types of resources: land, capital and labour. Firstly, taking a look at land, which is defined as the resources given by the nature as factors of production. Due to no competition, monopolies may not pay enough attention on the use of the natural resources. There are many cases where the carelessness has caused global disasters such as the BP’s recent oil spill. The consequences are not only inefficient use but also the generation of negative externalities such as pollution.
Capital are the factors of production that are man-made, for instance plant and machinery. There is no incentive for the monopoly to be efficient due to lack of competition and therefore the capital resources may not be allocated as efficiently as it could be in the competitive market. However, monopolies tend to operate on a large scale, which in that case the firm is able to use up all the potential output of the capital.
Labour, on the other hand, is likely to be exploited, due to there being only one employer in the whole industry. In other words, workers will have no choice other than to work for one firm, therefore the monopoly gets the upper hand in deciding the wage or salary. Every firm’s...