Monopoly: A monopoly exists when there is a single seller in a market, and there are no close substitutes for the product. This gives the monopolist significant market power to control the price.

Market Failure due to Monopoly: A monopoly leads to market failure for several reasons:

• Higher Prices: A monopolist will restrict output and charge a higher price than would prevail in a competitive market. This means consumers pay more for the good or service.
• Lower Quantity: The monopolist will produce a lower quantity than would be produced in a competitive market. This means there is less of the good or service available to consumers.
• Reduced Consumer Surplus: Consumers experience a reduction in consumer surplus because they pay higher prices and have access to a smaller quantity of the good or service.
• Inefficient Resource Allocation: Monopolies tend to be less efficient than firms in competitive markets. They have less incentive to innovate and reduce costs because they face less competitive pressure. This can lead to resources being misallocated, as the monopolist doesn't have to respond to consumer demand signals as effectively. The monopolist may also restrict output to artificially inflate prices, leading to a deadweight loss – a loss of economic efficiency for society.

In summary, a monopoly results in a loss of consumer welfare (due to higher prices and lower quantities) and an inefficient allocation of resources, both of which are characteristics of market failure.

Arguments for Government Intervention:

• Correcting Market Failure: Government intervention can address situations where the market fails to allocate resources efficiently, leading to improved economic welfare.
• Promoting Social Welfare: Intervention can promote social welfare by addressing externalities, providing public goods, and regulating monopolies.
• Addressing Inequality: Intervention can be used to reduce inequality through policies like progressive taxation and welfare programs.

Arguments Against Government Intervention:

• Information Problems: Governments may lack the information necessary to effectively intervene in markets.
• Bureaucracy and Inefficiency: Government intervention can lead to bureaucracy, inefficiency, and corruption.
• Distortion of Market Signals: Intervention can distort market signals, leading to unintended consequences.
• Reduced Incentives: Intervention can reduce incentives for firms and individuals to innovate and improve efficiency.

Examples:

• Example 1: Pollution Control (Externalities): The government can impose taxes on polluting industries or regulate their emissions to reduce negative externalities. This addresses the market failure caused by the failure to account for the social cost of pollution.
• Example 2: National Health Service (Public Goods): The provision of a National Health Service (NHS) is a government intervention to provide a public good (healthcare) that would be underprovided by the market due to the free-rider problem. This ensures that everyone has access to healthcare, promoting social welfare.

Diagram:

The diagram should show a typical monopoly demand and supply curve. The monopoly's marginal cost (MC) curve should intersect the demand curve at a point where the quantity supplied (Qs) is less than the quantity that would be supplied in a competitive market (Qc). The price (P) at which the monopoly restricts supply should be higher than the competitive price.

Explanation:

1. Restricted Supply: The monopoly restricts the quantity of the good supplied, moving the supply curve to the left. This results in a lower quantity supplied (Q1) compared to what would be supplied in a competitive market (Q2).
2. Higher Price: The reduced supply, combined with the existing demand curve, leads to a higher price (P1) compared to the competitive price (P2).
3. Misallocation of Resources: The restricted supply means that fewer resources are being used to produce the good than would be if the market were competitive. This represents a misallocation of resources because resources are not being used in the way that maximizes overall societal welfare. Some consumers who would have benefited from the good at a lower price are priced out of the market.
4. Deadweight Loss: The area representing the deadweight loss is the triangle formed between the demand curve, the monopoly price, and the quantity supplied. This triangle represents the loss of total surplus to society due to the monopoly's restricted supply.

The diagram clearly demonstrates how a monopoly's restricted supply leads to a higher price and a lower quantity supplied, resulting in a misallocation of resources and a reduction in overall economic welfare.