Question

Consider a market in which a firm has monopoly power. Suppose in addition that the firm produces under the presence of either a positive or a negative externality. Does the externality necessarily lead to a greater misallocation of​ resources? A. No. In the presence of a negative​ externality, since the monopolist produces less than the competitive​ quantity, it may end up producing the socially efficient quantity.​ However, in the case of a positive​ externality, since a competitive market produces too​ little, a monopolist will only exacerbate the problem. B. Yes. In the presence of a negative​ externality, since the monopolist produces more than the competitive​ quantity, it will make the negative externality worse. And in the case of a positive​ externality, the monopolist will exploit its monopoly power and produce even less than a competitive​ market, thus exacerbating the problem. C. No. Given a market with monopoly power is already​ inefficient, the concept of a positive or negative externality does not apply. D. Yes. An externality presents an opportunity for a firm to exploit the situation to earn positive economic profits. In the case of a firm with monopoly​ power, this ability to exploit the situation is even greater and therefore the externality leads to a greater misallocation of resources.

Answer 1

Answer:

A) No, in the presence of a negative externality, since the monopolist produces less than the competitive quantity, it may end up producing the socially efficient quantity.  However, in the case of a positive externality, since a competitive market produces too little, a monopolist will only exacerbate the problem.

Explanation:

Monopolists produce less than the competitive quantity (marginal revenue = marginal cost) but charge a higher price for their products. In case a negative externality is produced, then the competitive quantity should decrease and the monopolist might end up producing the socially efficient quantity.

Given the same scenario where the monopolist produces less than competitive quantity, but a positive externality is produced, then the socially efficient quantity should increase, but the monopolist will not increase their output.