Social cost of Monoploies Essay

Submitted By miketamayo
Words: 1335
Pages: 6

Cost of Monopolies to Society The term monopoly refers to a business, frequently a large company, that is the only supplier of a good or service. Since monopolies are often the only provider of a service or product, they have the opportunity to make higher than normal profits. Unlike products and services offered in other market structures, most monopolistic products and services have limited or no substitutes. Like other providers, they are however still dependant on their customers. Monopolies impact our society both negatively and postively. The impact is more negative, however; in fairness, this paper will explore both sides. A monopoly market structure essentially allows the provider to set any price they decide since they are the market and remain unchecked by competition and therefore have market power. They are said to be price makers. Since pricing is not a result of free-market forces many would argue that these companies are engaged in price-fixing, which we know is illegal according to Antitrust legislation. They are able to set their own prices regardless of demand because they are fully aware that the consumer has no alternatives to choose from. This is particularly true for goods and services whose demand is inelastic. In a market economy the forces of supply and demand determine the prices of goods and services and the quantities sold. Not so in a monopolistic market. More often than not prices are higher than marginal cost. Consumers would argue that this type of market is inefficient since it lacks equilibrium . Typically the result is market failure and is detrimental to society. The producer or supplier holds a contrasting view. Higher prices are desireable and this market structure is preferred. Nonetheless it is obvious that monopolies put their own needs ahead of the needs of society.
Since there are limitied alternatives a monopoly has no incentive to innovate or produce better products and services. Microsoft for example released its first version of Windows in 1985. Twenty-eight years later the latest release is Windows 8. Why haven’t we seen more robust capabilities in their product? Is it because the manufacturer lacks the ability to do so, or is there simply no incentive for them to innovate? Some monopolies almost never provide new or improved products and services. They supply the same product or service over the years despite the fact that consumers expect more . Let’s face it, without competition there is no incentive. Society suffers because consumers are forced to purchase inferior goods and services Not only are consumers forced to purchase inferior products and services, they are also forced to deal with increased prices resulting from the actions of monopolies. Since monopolies can set any price they desire, they are able to pass the costs associated with their actions to consumers. For example, after the Gulf Coast oil spill our government issued a moratorium on all deepwater offshore drilling. This of course resulted in increased fuel prices at the pump since production was reduced. As Sierra Club public lands program director Athan Manuel said at the time, "The whole country went crazy when gas hit $4 a gallon." The Organization of Oil Exporting Countries (OPEC) further compounded the problem. According to the U.S. Energy Information Administration, OPEC produces about 40% of the total oil produced in the world. Even though OPEC is more of a cartel, their behavior is often more monopolistic; they produce a smaller quantity and charge a price above marginal cost. Because of their market share OPEC’s actions can and do influence international oil prices. They chose not to increase production after the oil spill.
The earthquake that caused damage to Japan’s Fukushima Daiichi nuclear power facility is another example. Although the facility was operated by a private company, the public will bear the cost in the form of higher prices, assuming of course that the…