In the short run, the firm operates where marginal cost (MC) equals marginal revenue (MR). This determines the quantity produced. The price is then determined by the demand curve at that quantity. In this case, the firm is selling 100 units at a price of £20.

However, in the long run, the entry of new firms shifts the demand curve faced by the existing firm to the left (it becomes less steep). This is because consumers have more choices. As a result, the firm must lower its price to sell the same quantity. The firm will continue to reduce its price until it reaches the point where marginal cost (MC) equals marginal revenue (MR) *again*. This is the long-run equilibrium.

The key reason for the price and quantity changes is the entry of new firms. This increases competition, reduces the demand for the individual firm's product, and forces the firm to lower its price and reduce its output. In the long run, economic profits are driven to zero due to the increased competition.

(8 marks)

A monopoly, by definition, faces a downward-sloping demand curve. This allows the monopolist to restrict output and charge a higher price than would prevail in a competitive market. This leads to a deadweight loss, representing a loss of total surplus (consumer + producer surplus) to society. Consumers experience a lower quantity of electricity and a higher price, reducing their consumer surplus. The monopolist enjoys a greater profit margin, increasing their producer surplus. However, the loss in consumer surplus is likely to outweigh the gain in producer surplus, resulting in a net loss of welfare.

Consumer Welfare: Consumers are worse off due to the higher price and lower quantity. This reduces their purchasing power and access to a vital service. The deadweight loss represents the value of the consumer surplus that is not being realized.

Producer Welfare: The monopolist enjoys higher profits due to the lack of competition. This increases their producer surplus. However, the higher profits are achieved at the expense of overall societal welfare.

Government Intervention: Governments often intervene to address the negative consequences of monopolies. Possible interventions include:

• Price Controls: Setting a price ceiling below the competitive level can benefit consumers, but may lead to shortages.
• Regulation: Regulating the monopolist's output and prices can aim to mimic competitive outcomes.
• Competition Policy: Breaking up the monopoly into smaller, competing firms can increase competition and lower prices.
• Subsidies: Subsidizing the monopolist's production could lower prices for consumers.

The effectiveness of each intervention depends on the specific circumstances of the market and the goals of the government.

A monopoly can be prevented from being economically efficient through several mechanisms. The core issue is that a monopoly restricts output to maximize profit, leading to a situation where marginal cost (MC) is greater than marginal revenue (MR) and price (P) is greater than MC. This creates a deadweight loss, representing a loss of economic welfare.

Diagram: A standard monopoly diagram would show a downward-sloping demand curve and an upward-sloping marginal revenue curve. The profit-maximizing quantity is where MR = MC. The corresponding price is higher than the marginal cost. This demonstrates the allocative inefficiency of a monopoly.

Government intervention can address this inefficiency in several ways:

• Price controls: The government can impose a price ceiling below the monopoly price. This can increase output and improve allocative efficiency, but it may also lead to shortages.
• Regulation: The government can regulate the monopoly's output and price, requiring it to operate as if it were in a competitive market. This can involve setting a price that reflects marginal cost.
• Promoting competition: The government can take steps to break up the monopoly into smaller, competing firms. This can be achieved through antitrust legislation.
• Allowing for entry: Reducing barriers to entry can encourage new firms to enter the market, increasing competition and driving down prices.

In conclusion, government intervention is often necessary to address the economic inefficiency of monopolies. The choice of intervention depends on the specific circumstances of the market and the desired outcome. The goal is to move the market towards a more competitive state where output is closer to the socially optimal level.