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Module 28
Monopoly, Government Policy, and Social Welfare
What’s New in the Fourth Edition?
Module Objectives
• Why does the presence of monopoly typically reduce social welfare?
• What tools do policy makers use to address the problem of monopoly?
Teaching Tips
Welfare Effects of Monopoly
Creating Student Interest
• Remind students that antitrust laws in the United States were designed to prevent the formation of
monopoly. Ask students why the government would want to prevent monopolies? By now they
should say because the monopolist will produce less and charge a higher price. Now ask them if that
is really fair given that the monopoly firm is able to earn higher profits. Do we really want to have
a law that sets a limit on how much profit a firm can earn? This should generate some lively
discussion and will lead nicely to a comparison of total surplus under monopoly and perfect
competition.
• Use Handout 28-1 to help students think through regulation of monopolies.
Presenting the Material
• Start with a review of consumer and producer surplus and market efficiency. Next, illustrate what
happens to producer surplus, consumer surplus, and total surplus when the entire market output is
supplied by one firm. Point out that the real problem with monopoly is the inefficiency it creates in
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Figure 28-1
Government Policy Towards Monopoly
Creating Student Interest
• Ask students whether they think Facebook is a monopoly. They may say no, because there are many
social networks. Or, they may say yes, because so many people use it. Ask them if the government
Presenting the Material
• Use Handout 28-1 to help students think through regulation of monopolies.
Dealing with Natural Monopoly
Creating Student Interest
• Returning to the local electric company, ask students why that firm is a monopoly. Discuss the high
capital outlays that mean it doesn’t make sense to have more than one producer.
Presenting the Material
Module Outline
I. Welfare effects of monopoly
A. There are welfare losses from monopoly; the loss to consumers is greater than the gain in
profits for the monopoly. Figure 28-1 shows the loss.
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Figure 28-1
II. Government policy towards a monopoly.
A. If the monopoly is not a natural monopoly, it is best to prevent its existence or break it up.
B. Antitrust laws prevent or eliminate monopolies.
III. Dealing with natural monopoly
A. Public ownership, examples include rail service and mail delivery
1. Publicly-owned firms are less eager to keep costs down, so they often do poorly in
practice.
B. Regulation, examples include local utilities
Case Studies in the Text
Economics in Action
The (R)Evolution of the American High-Speed Internet Market—This EIA discusses the high price of
cable and broadband access in the United States relative to other countries in the world.
Ask students the following questions:
1. Why is the provision of cable service a natural monopoly? (There are large fixed costs
3. Why is broadband access cheaper in other countries? (Regulators in other countries
Web Resources
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Handout 28-1
Date_________ Name____________________________ Class________ Professor________________
Regulate It?
Are the following companies natural monopolies? Would price regulation give enough incentive to the
firm to innovate? Would price regulation protect consumers?
Your local electricity company
Monopoly?
Would price regulation give incentive for the firm to innovate?
Would price regulation protect consumers?
Your local cable TV company
Monopoly?
Would price regulation give incentive for the firm to innovate?
Would price regulation protect consumers?
The theme park in your area
Monopoly?
Would price regulation give incentive for the firm to innovate?
Would price regulation protect consumers?
Your trash pickup company
Monopoly?
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Handout 28-2
Date_________ Name____________________________ Class________ Professor________________
Price Discrimination on Campus
Imagine that you represent the student government on campus. Can you engage in profitable price
discrimination on the following services? Why or why not?
Parking spaces
Theater productions
Sports events