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Monopoly and Market Power.docx

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University of Alberta
Yasser Fahmy

Monopoly and Market Power A firm is considered a monopoly ifIt is the sole seller of its productIts product does not have close substitute Why monopolies ariseThe fundamental cause of monopoly is barriers to entry There are three sources of these barriers Ownership of a key resource The government gives a single firm the exclusive right to produce some good Costs of production make a single producer more efficient than a large number of producers Monopoly ResourcesAlthough exclusive ownership of a key resource is a potential source of monopoly in practice monopolies rarely arise for this reasonGovernmentCreated Monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain market Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest Natural Monopolies An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firmsA natural monopoly arises when there are economies of scale over the relevant range of output
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