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Resource Allocation Under Monopoly

 Resource allocation under monopoly

            The resource allocation is done with respect to ascertain the welfare has been improved or downtrodden. The actuality is monopoly directs to misallocation of resources. In order to investigate, we relate price, output and profits under monopoly and perfect competition.

  1. Excess Capacity

In a perfectly competitive market, in the long run, Price = (AR = MR) = LMC = LAC at its minimum. This means that competitive firms in the industry in the long run are earning profits. They are optimum sized and are producing to their optimum capacity. Since the monopoly firm has excess capacity, there is under allocation of resources to the monopoly firm and misallocation of resources in the economy.

  1. Loss in Consumer’s Welfare

We presume cost curves and the revenue curves are the same for both the monopoly firm and a perfectly competitive industry. The consumers are worse off under monopoly because they are made to pay a higher price and get a small output than under perfect competition where they get more goods at a lower price. This is a loss in consumer’s welfare.

  1. Under Utilisation of Factor Input

Presence of monopoly leads to a less utilisation of a factor input than under perfect competition. In perfect competition factor market, the price of a factor input, say labour is given.

  1. Dead Weight Loss

Further monopoly reduces consumer’s surplus. This is for the reason that productivity under monopoly is smaller and the price is higher than perfect competition. The reduction in the welfare of the consumer can be identified as the loss in consumer’s surplus. Hence overall, we can judge that monopoly leads to misallocation and under utilisation of resources and reduction in consumer’s welfare.

Control of Monopoly Through Taxation

      Taxation is another way of controlling monopoly power. The tax may be levied lump-sum without any regard to the output of the monopolist. Or it may be proportional to the output, the amount of tax rising with the hike in output. By levying lump sum tax, the government can reduce or even eliminate monopoly profits without affecting either price or output of the product. Since the monopolist’s marginal cost curve and the marginal revenue curve remain unaffected by the tax imposition, any change in the existing price – output combination would only lead to losses.

Specific Tax

The government can also reduce monopoly profits by levying a specific or a per unit tax on the monopolist’s product. As per unit tax on monopoly output has the effect of shifting both the average and marginal cost curves upward by the amount of the tax. Higher the demand elasticity of tax, the higher the price for the product and lower the output; the ultimate loss will be borne by the public rather than by the monopolist.

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