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Market Failure and Government Intervention
Is society better off or worse off under monopoly as compared with perfect competition? Referring again to Figure 8.11, the reader will verify that under perfect competition the net benefits to society are given by the sum of consumer and producer surplus, P*AE + BP*E = BAE. Under monopoly, however, the net benefits to society are given by the sum of consumer and producer surplus PmAC + BPmCF = BACF. Since BACF < BAE, then society has been made worse off as a result of monopolization of the industry. The lost consumer and producer surplus is given by the area GCE + FGE = FCE. The area FCE is referred to as total deadweight loss. The area GCE is referred to as the consumers’ deadweight loss, which represents the reduction in consumer surplus that is not captured by the monopolist. The area FGE is referred to as producers’ deadweight loss. Since the monopolist is not producing at minimum per unit cost, producer deadweight loss represents the loss to society from the inefficient allocation of productive resources. Definition: Total deadweight loss is the loss of consumption and production efficiency arising from monopolistic market structures. It is the loss of consumer and producer surplus when a monopolist charges a price that is greater than the marginal cost of production. Governments can attempt to reduce or eliminate total deadweight loss by making it illegal for a firm or group of firms to exercise or acquire market power. Antitrust legislation represents an attempt by government to move industries closer to the “ideal” price and output conditions that would prevail under a perfectly competitive market structure. Definition: Antitrust legislation represents government intervention in the marketplace, such as making it illegal for firms in an industry to engage in collusive pricing and output practices, to prevent industry abuse of market power.
LANDMARK U.S. ANTITRUST LEGISLATION As we have already seen, a perfectly competitive market structure provides a model for evaluating economic efficiency. As we have seen in Chapter 8 and elsewhere, perfectly competition is defined by a number of important requirements, including a large number of buyers and sellers, homogeneous goods and services, perfect information, easy entry into and exit from the industry by approximately identical firms, and the absence economies of scale. Also characteristic of perfectly competitive markets is the principle of laissez-faire, or nonintervention by government in the marketplace. The conditions that define perfectly competitive market structures, however, are rarely satisfied in practice. The output of different firms, for example, are typically differentiated; buyers and sellers rarely have complete information about the goods and services being transacted; and entry
