Question

What is a monopsony?

Short answer

A monopsony is a market condition in which there is only one buyer for a particular good or service, possessing substantial market power to influence the price and quantity. It differs from a monopoly, where there is only one seller with significant market power. Monopsonies can lead to inefficiencies, such as reduced revenues for sellers and deadweight loss. An example of a monopsony market can be a small town with only one large employer hiring most of the local workforce.

Step-by-step solution

Definition

A monopsony is a market condition in which there is only one buyer for a particular good or service. This single buyer has substantial market power to influence the price and quantity of that good or service. #Step 2: Compare and Contrast with Monopoly#

Comparison with Monopoly

A monopsony is somewhat similar to a monopoly, but there are differences. In a monopoly, there is only one seller of a good or service with significant market power to set prices. In a monopsony, it's reversed – there is only one buyer with significant market power to influence prices and quantities. #Step 3: Explain the Effects of Monopsony#

Effects of Monopsony

A monopsony can lead to inefficiency in the market, just like a monopoly. The monopsonist can use its power to bargain for a lower price than the equilibrium price, leading to lower revenues for the sellers and a reduction in the quantity supplied, resulting in deadweight loss. #Step 4: Provide an Example of a Monopsony market#

Example

An example of a monopsony market can be a small town with only one large employer (such as a manufacturing plant) which hires most of the local workforce. Since this employer is the only buyer of labor in this particular case, it can use its dominant position to keep wages low, forcing workers to accept lower wages than they would receive in a more competitive market.