11.4 Evils and Wastage of Monopoly

Monopoly market is restrictive and hence considered as an evil form of market. Monopoly is also a source of wastage. It underutilizes productive capacity and reduces Consumer’s Surplus. Underutilization of capacity may cause some workers to remain unemployed. These and other shortcomings can be analyzed and explained with the help of a comparative diagram in Figure 43.

We find both competitive and monopoly equilibrium positions marketed by point e₁ and e₂ respectively. A competitive firm produces output Q₁ and sells at price P₁. A monopolist produces smaller output Q₂ (Q₂<Q₁) and charges higher price P₂ (P₂>P₁). Competition allows only normal profits to a firm as part of the average cost of production. A monopolist earns extra monopoly profits of the size CSRP₂. Under competition output is produced at point e₁ which is the lowest point on the average cost line. Therefore competition makes fuller utilization of the productive capacity. Under monopoly output is produced at point S which is on the falling phase of AC. This shows underutilization of the productive capacity. Finally, the size of the Consumer’s Surplus under competition is as large as De₁P₁ while that under monopoly is only DRP₂. Hence under monopoly there is higher price, lower output, underutilization of productive capacity or wastage of resources and reduction in Consumer’s Surplus.

Such evils or wastage under monopoly are also present more or less in every other imperfect market with a lower degree of competition.