Are Monopolies Necessarily Less Efficient Than Perfect Competition

This essay will look at efficiency between both a monopoly and a perfect competition, and whether a monopoly is necessarily less efficient than perfect competition. Using diagrams and equations reflecting the optimal choice of output, marginal revenue and marginal cost for monopolies, I will explain how efficiency is affected by low levels of production. At the same time monopolies can increase efficiency due to their ability in price discrimination, they price people differently and therefore people pay what they truly believe the good is worth. There needs to be a clear description of the differences between monopoly and perfect competition as well as efficiency; an analysis of deadweight loss and natural monopoly is also important with regards to the monopolies efficiency. Therefore even though a competitive economy is efficient and a monopoly suffers from certain inefficient levels of production it is not necessarily less efficient than perfect competition.

A monopoly is a single supplier within a market that chooses to produce at any point on the market demand curve; they appear when other firms find it unprofitable or impossible to enter a market. The market becomes affected by high barriers to entry, which are split into technical and legal barriers. Technical barriers are created when the production of a good produces decreasing marginal and average costs over a wide range of output levels; in this situation, large scale firms are low cost producers. Another technical barrier to monopolies is their ability to discover a low cost production technique and having ownership over productive resources therefore preventing the formation of other firms. Legal barriers occur when a monopoly is created by the government as a matter of law, there is the creation of a patent that allows the one firm to use the basic technology for a product.

Varian describes how monopolies arise within his writings, he states that monopolies develop when the minimum