Lecture 17
MORE ON MONOPOLY

• Inefficient allocation of resources
• Cost advantages and disadvantages
• Innovation
• Pollution tax

1. Compared with perfect competition

• Inefficient resource allocation:
  The monopolist's output is lower
• The price is higher
• Profits in the long run:
  The monopolist's profit may exceed the opportunity cost of capital in the long run

2. Costs for a monopoly

1. Monopoly may incur higher costs due to:
   • Bureaucratic inefficiencies
2. Monopoly may be able to lower costs due to:
   • Lack of duplication
   • Quantity discounts on purchase of inputs
3. Exercise: Show that if MC and AC shift down, optimal Q will rise and P will fall.

3. More innovation by monopolies?

• Schumpeter's argument:
  • Monopolies will do more R&D
  • If so, cost curves will shift down
• Arguments against monopolies doing more R&D?

4. Pollution tax

Consider a tax per unit of output.

• Effect on MC curve?
• Effect on optimal Q and P?
• Effect on pollution?