A monopoly of a firm exists, when it is the only firm supplying the output of the industry and there are barriers to entry prohibiting the new firms from entering that industry. These barriers could be anything ranging from legal barriers to brand loyalty or even anti competitive behavior from the existing monopoly.
It is often argued that interests of the general public are compromised by a monopoly since it is productively and allocatively inefficient and can charge a higher price for a lower level of output being the sole producers of it.
From the graph below it can be seen that there is a dead weight loss of consumer surplus. Being the only industry they are the price makers and prices are always set above the marginal cost unlike the competitive firms. For example most pharmaceutical companies set the price of their patented drug much above the marginal costs creating a dead weight loss of consumer surplus.
A higher price is charged for lower output. Prices are constrained by the demand curve, a higher price results in fall in demand that may subsequently lead to fall in revenue.
There are many grounds at the same time on which the argument of monopoly being productively inefficient can be defended. It is known that monopoly exploits the economies of scale and scope since producers in monopoly are often supplying goods and service on a very large scale which brings down the total average costs production. Reduction in costs leads to an increase in monopoly profits and some of the productive gains are transferred to consumers in the form of lower prices ensuring economic welfare for both consumers and producers.
A graph below explains how the economies of scale achieved from specialization and bulk buying brings down the marginal cost causing a...