How Does a Monopoly Affect the Economy?

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A monopoly contributes to price increases, leads to the creation of inferior products and discourages innovation. Monopolies inhibit free trade and limit the effectiveness of a free-market economy.

In a monopoly the sole provider of a good or service has the ability to fix prices. While there might be relatively little demand for a product, the provider can charge exorbitant prices because consumers are left with no alternatives. Instead of having to innovate and improve to keep pace with the competition, providers may even let the quality of their products decline. Consumers almost always have a choice, but when a monopoly exists, the alternatives available are not easy substitutes.

There are instances when allowing a monopoly can have a positive impact on the economy. Some ventures require a huge upfront capital investment. If a monopoly were not allowed in these cases, no one would participate out of fear they would not be able to recoup their investment and generate a profit. The building of a power plant is one example of this scenario. Once the plant is completed, the company that built it has the exclusive right to market power to a given service area for a predetermined period of time.