How do monopoly power and an unequal distribution of income count as market failures, and how are they measured?
Monopoly power and inequality as market failures: the welfare costs of monopoly power, factor immobility, the distinction between equity and equality, and the measurement of inequality using the Lorenz curve and Gini coefficient.
An Eduqas A520 answer to monopoly power and inequality as causes of market failure, covering the welfare costs of monopoly and the abuse of market power, factor immobility, the difference between equity and equality, and how inequality is measured with the Lorenz curve and the Gini coefficient.
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What this dot point is asking
Eduqas wants you to explain why monopoly power and an unequal distribution of income are treated as market failures, identify factor immobility as a further failure, distinguish equity from equality, and measure inequality using the Lorenz curve and the Gini coefficient. This connects the theory of monopoly to the welfare and distributional concerns that justify intervention.
Monopoly power as a market failure
These welfare costs are the rationale for competition policy (regulators such as the Competition and Markets Authority) covered later in the module.
Factor immobility
Inequality, equity and equality
Measuring inequality
Examples in context
- Big Tech. Concerns about market power in search, app stores and social media drive modern competition investigations.
- Former industrial regions. Occupational and geographical immobility after the decline of coal and steel left persistent regional unemployment.
- The UK Gini coefficient. Around 0.35 for disposable income, higher before taxes and benefits, illustrating how redistribution reduces measured inequality.
Try this
Q1. Explain why monopoly power is regarded as a form of market failure. [4 marks]
- Cue. Output restricted and price raised above marginal cost (), so allocative inefficiency and a deadweight welfare loss, plus possible X-inefficiency and abuse of power.
Q2. Explain the difference between equity and equality. [3 marks]
- Cue. Equity is fairness in distribution (a value judgement); equality is an identical distribution. A fair outcome need not be an equal one.
Exam-style practice questions
Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Eduqas Component 2 20214 marksAn economy's poorest 20 per cent of households receive 6 per cent of total income, while the richest 20 per cent receive 44 per cent. Explain what this suggests about the distribution of income and how a Lorenz curve would represent it.Show worked answer →
A short data-response question. Compare the income shares with an equal distribution.
Under perfect equality each 20 per cent of households would receive 20 per cent of income. Here the poorest fifth receive only 6 per cent (well below 20) and the richest fifth receive 44 per cent (well above 20), so income is unequally distributed.
On a Lorenz curve (cumulative share of income against cumulative share of households), this would show the curve bowing well below the 45-degree line of perfect equality, the further from the line the greater the inequality. Markers reward the comparison with equal shares and the correct Lorenz interpretation.
Eduqas Component 3 (micro) 202212 marksEvaluate the view that monopoly power is the most serious form of market failure.Show worked answer →
A levels-of-response essay. Knowledge and application: explain that monopoly power leads to higher prices, restricted output, allocative inefficiency (), a deadweight welfare loss, and possible productive and X-inefficiency, and can be abused (predatory pricing, limiting choice). Draw the monopoly diagram.
Analysis: develop these welfare costs and the case for competition policy.
Evaluation: weigh against other market failures (externalities and public goods may cause larger welfare losses, for example climate change), the potential benefits of monopoly (economies of scale, innovation funded by supernormal profit), and the role of contestability and regulation in limiting the abuse. Conclude with a supported judgement, for example that monopoly power is serious but not obviously the most serious, since environmental externalities can be larger.
Related dot points
- Oligopoly and monopoly: concentration and barriers to entry, interdependence and collusion in oligopoly, the kinked demand curve and game theory, monopoly equilibrium, price discrimination, and the costs and benefits of monopoly.
An Eduqas A520 answer to the two market structures with the most market power, covering concentration and barriers to entry, oligopolistic interdependence, collusion, the kinked demand curve and game theory, the profit-maximising monopoly, price discrimination, and the costs and benefits of monopoly power.
- Externalities and the environment: positive and negative externalities in production and consumption, private and social costs and benefits, the welfare loss from market failure, and environmental market failure.
An Eduqas A520 answer to externalities, covering positive and negative externalities in production and consumption, the distinction between private and social costs and benefits, the deadweight welfare loss when marginal social cost differs from marginal social benefit, and why environmental problems are a classic market failure.
- Government intervention and government failure: indirect taxes and subsidies, maximum and minimum prices, regulation, tradable pollution permits and state provision, and the causes of government failure.
An Eduqas A520 answer to the policy toolkit for correcting market failure, covering indirect taxes and subsidies, maximum and minimum prices, regulation, tradable pollution permits, state provision and information provision, and the causes of government failure such as unintended consequences, information gaps and regulatory capture.
- The distribution of income and wealth: the difference between income and wealth, the causes of inequality, the costs and benefits of inequality, and the policies governments use to redistribute.
An Eduqas A520 answer to the distribution of income and wealth, covering the distinction between income (a flow) and wealth (a stock), the causes of inequality, the costs and benefits of inequality, and the redistributive policies governments use including progressive taxation, benefits and the provision of public services.
Sources & how we know this
- Eduqas A Level Economics Specification (A520) — Eduqas (2015)