Explain briefly whether each statement is true or false, and give an example or counter-example.

a. Monopolies never increase social welfare.

b. Monopolies form naturally.

c. Monopolies cause less welfare loss when product demand is elastic.

See below.

a.

False.

• Sometimes, social welfare is increased by monopolies since they allow to minimize production costs due to their economies of scale and thus increase the total surplus more than a competitive market (with multiple small players) would (e.g. Nationalized railroad companies in Europe allow for cheaper fares).

b.

False

• Although monopolies can form naturally, they can also form though legislation. For example, the hydro-electricity company in Ontario (Hydro One) is a monopoly due to provincial legislation.

c.

True

• This is because monopolies will have less pricing power when demand is elastic and thus cannot push prices up too high. For instance, if a nationalized electricity company pushes prices too high, consumers can enroll in private solar-powered electricity companies and thus demand is elastic.