Most economists argue that a monopoly is inefficient because it

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BlackTom AI · Accepted Answer

Exploring why economists view a monopoly as inefficient involves weighing each proposed mechanism.
Option 1: 'has no incentive to minimize its costs.' While a monopolist may have some cost-minimization incentives, this statement is not the core reason for inefficiency. Monopolies can still reduce costs, but that doesn't guarantee socially optimal output; the main issue is price and quantity relative to marginal cost, not simply cost-minimization.
Option 2: 'usually produces unsafe products if not regulated by government.' Monopolies are not inherently tied to producing unsafe products; safety is a regulatory and quality-control matter, not a defining feature of monopoly inefficiency. A monopolist could produce safe or unsafe goods, but safety concerns are separate from the classic deadweight loss argument.
Option 3: 'produces too little output and sets a price above marginal cost.' This captures the standard welfare critique: a monopolist restricts quantity to raise price, causing price to exceed marginal cost and resulting in deadweight loss. The reduced output means fewer trades than at competitive equilibrium, harming overall social welfare.
Option 4: 'produces too much output and thus wastes scarce resources.' Overproduction is not characteristic of a typical monopoly scenario. In fact, monopolies tend to underproduce relative to the efficient level because they restrict output to raise prices; producing too much would lower profits and reduce price, which is unlikely under monopoly power.
Option 5: 'earns too much profit by charging consumers any price it wants.' While a monopoly can earn high profits, the phrase 'any price it wants' oversimplifies market dynamics and ignores demand, marginal cost, and the profit-maximizing condition. The inefficiency reason is not merely profit level but the misallocation of resources due to restricted output and price above marginal cost.

Thus, option 3 best aligns with the standard economic explanation for monopoly inefficiency, highlighting underproduction and pricing above marginal cost which creates deadweight loss.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

Most economists argue that a monopoly is inefficient because it

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