Microeconomics Report: Empirical Study of Social Inefficiency

This report delves into the microeconomic concept of social inefficiency arising from monopolies. It begins by outlining the standard economic theory, which posits that monopolies lead to a net welfare loss due to misallocation of resources, resulting in deadweight loss. The report then examines empirical studies conducted to quantify this social cost, including Harberger's work estimating welfare costs in various industries and Posner's analysis of opportunity costs. The report also discusses alternative approaches, such as the Leibenstein approach, which considers inefficiencies arising from monopolies operating at safe margins. The report presents key findings from various studies, including welfare loss percentages and the impact of price elasticity, providing a comprehensive overview of the economic consequences of monopoly power and the methodologies used to assess them. The report uses various tables and figures to present the data and findings. The references include the key papers which are discussed in the report.

Running head: MICROECONOMICS
Microeconomics
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Table of Contents
Empirical study of social inefficiency of monopoly........................................................................2
References........................................................................................................................................8

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Empirical study of social inefficiency of monopoly
The standard theory of microeconomics and that of industrial economics suggest that
existence of monopoly power in the market leads to a net loss in welfare resulted from
misallocation of resources (Jahantigh et al. 2015). This is called deadweight loss from monopoly
power. In other words, the monopoly market inflicts a direct cost to welfare leading to social
inefficiency.
Figure 1: Social inefficiency from monopoly
In the above figure resulted inefficiency from monopoly power is shown by the shaded
triangle. Because of maximum market power in the market, monopolist sells a lower than
socially efficient output at a higher price. Empirical studies had been conducted to compute the
social cost monopoly. The past paper mostly attempted to compute social cost of monopoly by
computing area of the triangle indicating welfare loss. With passes of time new papers had been
developed using new approach to measure inefficiency.

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The paper developed by Harberger (1954) attempted to estimate the social cost of
monopoly. The article named ‘Monopoly and resource allocation’ estimated the welfare cost of
monopoly in 37 selected USA industries. The researcher concluded that deviation from Pareto
optimal resource allocation and resulted disruption in allocation of resources and lost in social
welfare can be represented with welfare triangle (Harberger 1995). The table below summarizes
the empirical evidences and finding of this paper
Table 1: Evaluation of welfare cost under monopoly

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The column 1 of the table represents estimated profit of the selected USA industries for a
period of 5 years. Column 2 represents the profit that could have been earned if the industries got
average profit instead of monopoly profit, Column 4 finally computed the welfare cost from
divergence of socially efficient resource allocation (Jahantigh et al. 2015) The paper finally
concluded that for the 37 selected USA industries, welfare loss from monopoly for a period
between 1924 and 1929 was nearly 8 percent of the national income.
Posner in his paper in 1974 however stated that the welfare loss arising from monopoly
power is not restricted to the welfare triangle. The opportunity cost for investing resources and
maintaining monopoly power needs to be considered as well. Harberger estimated the

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deadweight loss of monopoly power constituted 0.1 percent of Gross National Product (Posner
1975). A similar result is obtained in the paper developed by Schwartzman in 1960.
Figure 2: Ratio of deadweight loss to monopoly power for different increases in price and
elasticities of demand
(Source: Posner 1975)
The methods used in these paper were criticized as estimates were based only on increase
of monopoly price. A more relevant approach is to include elasticities of demand at every prices
along the demand curve. Using this approach, the paper found social loss of monopoly in the
airline industry to be 92 percent of industry’s revenue.
A different approach named Leibenstein approach had been used to estimate welfare cost
of monopoly in the paper developed by Jahantigh et al. in 2015. The estimates were based on

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data on concentrated industries of Iran from 1996 to 2006. The new approach believed that social
inefficiency of monopoly arises from operation of monopolist at safe margin. The industries
considered in the paper include "manufacture of tobacco products, recycling, mnufacture of
medical, precision and optical instruments, watches and clocks, manufacture of coke, refined
petroleum products and nuclear fuel, manufacture of fabricated metal products, except
machinery and equipment (Jahantigh et al. 2015). The estimated social cost for these industries is
equivalent to respect total sales percent of 100.47, 54.701, 41.039, 39.509 and 31.24.
Table 2: Evaluation of Leibenstain Welfare cost in concentrated industries of Iran

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(Source: Memarnejad 2013)
Table 3: Average welfare cost in concentrated Iranian industries
(Source: Memarnejad 2013)

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References
Harberger, A.C., 1995. Monopoly and resource allocation. In Essential Readings in
Economics (pp. 77-90). Palgrave, London.
Jahantigh, F., Tash, S., Nabi, M. and Pahlavani, M., 2015. Evaluation of Social Cost of
Monopoly in Iranian Industries: Leibenstein Approach. Iranian Journal of Economic
Studies, 4(1), pp.1-26.
Memarnejad, A., 2013. The Welfare Cost of Monopoly in Iranian Telecommunication Industry.
Iranian Journal of Applied Economics, 4(3), 83-107.
Posner, R.A., 1975. The social costs of monopoly and regulation. Journal of political
Economy, 83(4), pp.807-827.