Friday, February 10, 2006

Consumer surplus robbery!

Generally, microeconomists assume that it's better to leave the collective gains of trade in the form of a consumer surplus rather than monopoly profits. This isn't just because of the deadweight loss: they'd still believe this even if the monopolist could perfectly discriminate, and if the transferred inputs were put to an equally effective use.

The arguments usually rely on diminishing marginal utility of wealth.

Here's one reason that may not go through. Consider the case of a government-regulated (or subsidized) monopolist providing an industrial good, like energy or whatnot--that is, one that is used predominantly by businesses.

In that case, the "consumer surplus" provided by a competitive market or regulatory pricing decisions goes to rich businesses. (Not that there's anything wrong with that!) And the monopoly profits, that disappear in the price-regulated case, may have gone more or less to the government, cutting subsidies, etc. That is, it might have lowered taxes, or provided services.

So, ignoring all the complications, in some cases consumers can get screwed by government regulation to ensure a "consumer surplus"! That's the point I was trying to make in class. A price discriminating monopoly, if the producer surplus goes to the government, can in fact be more efficient from a diminishing-marginal-value-of-money perspective.

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