Monopolies are when a market contains a single provider of a particular good or service i.e. there is no competition, and therefore pricing decisions are not affected by the “invisible hand” of market forces. This can often lead to undesirable outcomes for consumers, and is something that governments may concern themselves with.
A monopoly arises due to one or more reasons:
- resources: A firm may control the key resources required for production
- regulation: The government may grant exclusive rights to a single company
- process: A single firm can produce at lower cost than would a number of firms
For example, distribution of natural gas and/or electricity would suffer were multiple providers required to construct their own infrastructure. In this case, any additional providers would lead to higher average total cost.
The Inefficiency of Monopoly
Most people criticize monopolies because they charge too high a price, but what economists object to is that monopolies do not supply enough output to be allocatively efficient. To understand why a monopoly is inefficient, it is helpful to compare it with the benchmark model of perfect competition.