Monopolist firms can cause disasters within a market due to a substantial number of reasons. They set their prices much higher than marginal cost and still manage to make profits as individuals do not have any alternative and the monopolist firm has no competitors. In this way, consumers are exploited and costs to society are prevalent. The monopolists restrict output to drive up prices. Since there is less consumer surplus (the benefit to consumers when the price they pay is less than what they would be prepared to pay (Economicsonline, 2018)), monopolists use this to gain power over their customers. Furthermore, these organisations employ fewer people than vast competitive markets, since employment is determined by output and it is already clear that monopolists limit their output.
Once a monopolist is established it becomes almost impossible for new firms to enter the market, meaning the resources cannot be allocated to where they are most needed. There are several ways that the negative effects of monopoly can be reduced as well as measures used to stop further monopolists entering the market. The government can intervene to address monopoly power by setting price controls. A maximum price is set for specified goods, to manage the affordability of certain goods. By doing this, monopolists cannot exploit their customers and this may even give rise to competitors entering the market.
Furthermore, if the government sees a monopolist firm as negatively effecting the economy they can choose to break it down. By separating the monopoly to several smaller firms, this gives rise to competition and ensure more jobs are created. Doing this also gives smaller companies an opportunity at competing within the market. For example, regulators in the EU are investigating Microsoft for potential abuse of market dominance. They are pushing to break the firm down into two smaller companies; one for its operating systems and another for their software, (The European Commission versus Microsoft: competition policy in high-tech industries, 2018).
In addition to this, governments can intervene to address the issue of monopoly power by imposing profit taxes. Since these taxes are added to the total fixed costs, monopolists will reduce their excess profits. For example, if the government imposes a 15% tax on profit, their fixed costs will go up. However, this will have no effect on the MC since fixed costs are independent of the level of output. Hence the equilibrium will be the same and so output and price will remain unchanged. The reduction of profit is the only change that will occur, (Economics Discussion, 2018).