General equilibrium consequences of monopoly PDF

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General equilibrium consequences of monopoly...

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General equilibrium consequences of monopoly   

Consider a country producing two types of goods in autarky: Food and Manufactures There are many producers in the food sector; perfect competition ensures: pf =MC f There is a single producer (monopolist) in the manufacturing sector; profit maximization ensures:



[ ( )]

pm∗ 1−

1 =MC m ε

At the autarky equilibrium we know: o Domestic demand = domestic supply

pm pf pf =MC f and

o

Utility maximization gives: MRS =

o

Profit maximization gives:

[ ( )]

pm∗ 1−



1 =MC m ε

Combining this info gives a wedge between MRT and MRS:

MRT =

MC m = MC f

[ ( )]

pm∗ 1− pf

1 ε

<

pf =MRS pm

General equilibrium with monopoly in manufactures 

With a monopoly in the manufactures sector, a point like point mon characterizes the autarky equilibrium: o Consumption and production must be at mon o Efficient production on PPF o Consumption at mon gives price ratio (equal to MRS) o MRT at mon lower than price ratio because of mark-up pricing in monopoly sector (so MRT < MRS = price ratio)



To be consistent we need: MRT/MRS = 1 −



Monopoly outcome is not first best!

[ ( )] 1 ε...