Mankiw's Principles of Microeconomics Chapter 15

1. How did your understanding of monopolies change after reading this chapter? What do you see differently now?

Monopolies can occur in several different forms such as government created, private industry, and natural monopolies. Monopolies occur due to one firm selling a product that has no close substitutes. Unlike a competitive market, monopolies are price makers so they try to maximize profit by selling their product at the demand level above the point at which the marginal cost meets the marginal revenue. When determining the profit of a monopoly the quantity sold at the monopoly price minus the average total cost times the quantity equals the profit of the monopoly firm. 

While reading this chapter, I was already familiar role that our patent laws play in maximizing profit for a monopoly; however, I was surprised to learn that in the prescription drug market patent laws extend to the inventing firm for a period of 20 years. It made me recall the section of our course that spoke about the benefits of research and how the government subsidizes research costs in order to promote the social well-being of the economy. It would seem to me, a patent that allows a monopoly to continue for 20 years until a competitor can compete with them is enough incentive to influence a firm’s decision to invest a larger portion of their profits into research.  

2. Trash removal is sometimes a government monopoly.  Why do you think that is?  Is your trash removed by a single hauler?  If yes, who chose the company and why?  If not, would you prefer a single choice? Why or why not?

Trash removal could be considered a government monopoly in some cases because it’s a public utility depending on where you live. In my current township, the town includes trash removal in a consolidated bill (trash, sewer, and water). In the case of a trash removal firm, they are guaranteed a revenue stream paid by the residents of the town. Even though the revenue stream is guaranteed and fixed, the owners of the firm can maximize profits by keeping costs low and running their operation at an economy of scale.