Is monopoly productively and allocatively efficient?

 If that price is above average cost, the monopolist earns positive profits.  Monopolists are not productively efficient, because they do not produce at the  minimum of the average cost curve. Monopolists are not allocatively efficient, because they do not produce at the quantity where P = MC. 

The problem of inefficiency for monopolies often runs even deeper than these  issues, and also involves incentives for efficiency over longer periods of time. There  are counterbalancing incentives here. On one side, firms may strive for new inventions and new intellectual property because they want to become monopolies  and earn high profits—at least for a few years until the competition catches up. In this way, monopolies may come to exist because of competitive pressures on firms. 

However, once a barrier to entry is in place, a monopoly that does not need to fear competition can just produce the same old products in the same old way—while still ringing up a healthy rate of profit. John Hicks, who won the Nobel Prize for economics in 1972, wrote in 1935: “The best of all monopoly profits is a quiet life.” He did not mean the comment in a complimentary way. He meant that monopolies may bank their profits and slack off on trying to please their customers. 

When AT&T provided all of the local and long-distance phone service in the United States, along with manufacturing most of the phone equipment, the payment plans and types of phones did not change much. The old joke was that you could have any color phone you wanted, as long as it was black. However, in 1982, government litigation split up AT&T into a number of local phone companies, a long-distance phone company, and a phone equipment manufacturer. An explosion of innovation followed. Services like call waiting, caller ID, three-way calling, voice mail through the phone company, mobile phones, and wireless connections to the internet all became available. Companies offered a wide range of payment plans, as well. It was no longer true that all phones were black. Instead, phones came in a wide variety of shapes and colors. The end of the telephone monopoly brought lower prices, a greater quantity of services, and also a wave of innovation aimed at attracting and pleasing customers. 

For PDF copy of Solved Assignment

Any University Assignment Solution

WhatsApp - 8409930081 (Paid)