Today's Question
A monopoly is a single seller with no close substitutes. Unlike competitive firms, a monopolist can SET prices. However, they still face a constraint: the demand curve. Why does a monopolist produce LESS and charge MORE than a competitive market would? Who bears the cost of this inefficiency?
Model Answer
The monopolist restricts output to drive up price. If they produced more, they'd have to lower the price on ALL units. So they stop short of the efficient quantity. The cost falls on: (1) Consumers who pay higher prices, (2) Some potential consumers who are priced out entirely, and (3) Society as a whole - there's 'deadweight loss' representing trades that would benefit both buyer and seller but don't happen. Resources get misallocated.