(a) Outline any three disadvantages of monopoly (b) In what two ways can monopoly be controlled?

Answer Details

(a) Three disadvantages of monopoly. A monopoly is a market in which a single seller controls the entire supply of a product that has no close substitutes.

1. Higher prices and consumer exploitation. Being the only seller, the monopolist can restrict output and charge a price higher than would prevail under competition, so consumers pay more.
2. Inefficiency and poor quality. With no competitors to challenge it, the monopolist has little incentive to cut costs, improve quality, or innovate, so resources may be used inefficiently.
3. Restriction of output and consumer choice. The monopolist may deliberately produce less than the market needs to keep prices high, and consumers are denied variety since there is only one supplier. (Other valid points: it may earn abnormal (excess) profits at the public's expense and can lead to unequal distribution of income.)

(b) Two ways monopoly can be controlled.

• Government price control (regulation). The government can fix a maximum price for the monopolist's product so that it cannot exploit consumers.
• Anti-monopoly legislation and encouragement of competition. The government can pass laws that break up monopolies, prevent restrictive practices, or remove import restrictions so that competing goods enter the market. (Nationalization of the monopoly and taxation of its excess profits are also acceptable.)