Monopoly and Resource Allocation

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Monopoly and Resource Allocation

• Monopolies misallocate resources resulting in
  deadweight social welfare losses (a.k.a.
  Harberger triangles)
• How significant is this?
• Is 20, 30 or 40 of our economy monopolized?

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• US manufacturing industry 1924-28
• Assume long run constant returns
• Monopolistic misallocation stems from the
  difference that exist between Marginal Cost
  Price
• Higher rates of return to capital reflect such
  misallocation
• High return means too little capital and low
  return means too much capital

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• Industry average rate of return is 10
• Build 10 return into cost curve
• Industry is earning 20 on 10 million capital
• Excess profit is 1 million
• With elasticity of demand 1, then we must
  increase resources by 1 million to increase
  supply enough to wipe out excess profit
• Eliminate monopoly will improve consumer welfare
  by 0.1 of national income or 2 per capita