Public Goods Common Resources Externalities – Positive or Negative Monopolies and Oligopolies...
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Transcript of Public Goods Common Resources Externalities – Positive or Negative Monopolies and Oligopolies...
• Public Goods
• Common Resources
• Externalities – Positive or Negative
• Monopolies and Oligopolies
• Information Asymmetry
When markets fail, governments may be able to correct the problem
1. How do you face competition in your daily life?2. How does competition apply to economics in a
positive and a negative way?
Many buyers and sellers in the market
Goods offered by various sellers are the same
Firms easily enter and exit the market
Buyers and sellers are well informed
Single seller in a market
High barriers to entry prevent competition
Single firm controls key resource
Government grants exclusive operating rights
Patent and Copyright System
Natural Monopolies – Economies of Scale
PerfectCompetition
PureMonopoly
MonopolisticCompetition
Oligopoly
Handful of large firms dominate a market
Products are similar but with slight differences
High barriers to entry keep new firms out
Temptation to collude but also to cheat
Many buyers and sellers in the market
Relatively low barriers of entry
Products are not all the same (differentiation)
Mini-monopolies…some control over price
MonopolyPure Monopoly - only one firm in the
industryWorking Monopoly- 25% + market share
What determines monopoly power?– the availability of close substitutes from
rival industries– ability to maintain barriers to entry
Key Features of Monopoly• There is one firm, which is also the industry• It produces a unique good/ service• There are complete barriers to entry and exit
from the industry.• Customers have only 1 firm to buy from, as
there are no direct substitutes- Limited Choice• The Firm is a ‘Price Maker’• The Firm has the ability to earn abnormal profits
in the long run• Low levels of economic efficiency- productive and
allocative efficiency not being achieved
QO
P
Short- run and long run abnormal profits
QE
PE
AR = DMR
MC
AC
Supernormal profit = (AR-AC)XQ = = TR-TC
The monopolist can maintain abnormal profits in the long run if :1.There are barriers to entry.These may be - artificial (e.g. patent, brand loyalty) or- natural (e.g. economies of scale)2.The market is not easily contestable
Long run equilibrium
MonopolyPossible barriers to entry
A clearly differentiated product with brand loyalty Economies of scale Legal/ regulatory barriers eg Patents, statutory monopoly- granted legal protection from competition eg Post Office in UK High sunk costs Ownership/control of key factors of production Other barriers- aggressive trading tactics- eg. Limit pricing (predatory pricing), the threat of aggressive merger and takeover, ownership/control of retail outlets and intimidation.
Contestable Markets: a market is perfectly contestable
1. the cost of entry and exit by potential rivals are zero
2. entry can be made very rapidly
A market is less contestable if there are:
Economies of Scale if market demand is =/> MES, then the firm is likely to be a natural monopoly
Sunk Costs: a firm’s investment e.g. specific capital, cannot be employed in alternative uses
Allocative efficiencyP = MCi.e the price a consumer is prepared to
pay = cost to society of producing an additional unit, assuming no external costs
Under PC, P = MCUnder monopoly, P > MC
Productive EfficiencyFirms are productively efficient if they
are producing at the lowest point on their lowest possible AC (ATC) curve.
Under PC firm is operating at min ATCUnder monopoly, firm operating at >
min ATC
Does the consumer always lose from monopoly?
If a monopolist faces identical costs to a perfectly competitive industry, and can prevent entry, a monopoly will result in
Higher pricesLower output
Natural Monopoly• There are some industries where EoS
are so large that competition would be neither profitable nor efficient
• Natural monopolies have continuously falling AC curves
• Egs. Electricity and gas infrastructures
Q
P
Natural Monopoly
QE
PE
AR = D
MR
MC
AC
‘Advantages’ of monopolySupernormal profits provide an incentive and a
source of funds for process and product innovation:
• new technologies that may reduce costs i.e. LRAC under monopoly < LRAC under perfect competition.
• new products increase consumer choice• E of S can lead to greater output and lower
prices than under PC