Tuesday, September 29, 2009

monopolies and consumer surplus

In a competitive market, each firm faces an inelastic demand curve; this means that the consumer surplus due to the existence of this firm is zero, so that having profitable firms stay in business and unprofitable ones exit passes a social cost-benefit analysis; the marginal benefit and cost of the firm's being in business are internalized to the firm. In a situation in which the firm has some monopoly power, however, the firm creates consumer surplus; from a social cost-benefit perspective, any profitable company produces net benefits, but so too may a somewhat unprofitable company, insofar as the consumers have fewer good places to turn if the company goes out of business.

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