Microeconomics Model Essays

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  Evaluate the view that monopoly always reduces economic welfare compared with perfect competition.IB HL · Paper 1, part (b) [15] · Evaluate

  A profit-maximising monopolist produces where marginal revenue equals marginal cost, at an output below and a price above the competitive level where price equals marginal cost, creating allocative inefficiency and a deadweight welfare loss relative to perfect competition.

  The standard case against monopoly is allocative inefficiency. A monopolist is a price maker facing the whole downward-sloping market demand curve, so its marginal revenue lies below price. Maximising profit where marginal revenue equals marginal cost, it produces less and charges more than a competitive industry would, where price equals marginal cost. At the monopoly output, the price consumers are willing to pay exceeds the marginal cost of production, so units that society values more than they cost are never made. The lost surplus over that range is a deadweight welfare loss, and some consumer surplus is transferred to the firm as abnormal profit.

  Yet the full answer does not stop there. It asks when monopoly might still raise welfare: where economies of scale mean a single large firm produces at a lower cost than many small ones, where a natural monopoly makes competition wasteful, and where abnormal profit funds the research and innovation that competitive firms cannot afford. It then weighs regulation against ownership and contests whether the welfare loss is as large as the static model implies...

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  Discuss the most effective ways for governments to manage common pool resources and protect sustainability.IB SL · Paper 1, part (b) [15] · Discuss

  Common pool resources, such as fisheries, forests and fresh water, are rivalrous but non-excludable, so without clear rights they are over-used and depleted, the tragedy of the commons. The over-extraction is a negative externality of production that leaves a welfare loss and threatens sustainability.

  A common pool resource is rivalrous but non-excludable. One person's use of a fishery, a forest or an aquifer reduces what is left for others, yet no one can easily be shut out, so each user has an incentive to take as much as possible before someone else does. Because each ignores the cost imposed on everyone else, the resource is over-extracted: the marginal social cost of use exceeds the marginal private cost, output runs beyond the sustainable social optimum, and a welfare loss results as the stock is depleted. This is the tragedy of the commons, and it threatens the sustainability of the resource for future generations.

  The full answer weighs the responses against one another: command-and-control limits and quotas, tradable permits that cap the total catch, taxation of extraction, Elinor Ostrom's case for collective self-governance by local users, and international agreements where the resource crosses borders. It tests each for enforceability and cost, using developed global examples of fishery collapse and recovery, before judging which works best and when...

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