Question

Explain the economic fundamentals necessary for a monopoly to charge a higher price than if the industry was perfectly competitive, but still achieve more total surplus. How would you argue for not breaking up this monopoly to the general population that does not consider itself likely to receive producer surplus?

Answer 1

Generally, the capability of a monopoly to charge higher prices depends on the elasticity of demand. Low elasticity of demand drives up the price of a good.
Further, under the first-degree price discrimination, the monopoly is able to extract maximum from consumers. Here, the monopoly does not charge a single price from all customers but it treats each individual and charge the price which is equal to the maximum willingness to pay. Here whole consumer surplus is get converted into the producer surplus.

Sometimes the government deliberately promotes such monopoly practices where monopoly is producing equal to the perfectly competitive market. it also reduces the overall cost of production, it could exhibit the feature of natural monopoly.