ECO101H1 Lecture Notes - Lecture 18: Allocative Efficiency, Deadweight Loss, Economic Surplus

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5 Apr 2017
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ECO101H1 Full Course Notes
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ECO101H1 Full Course Notes
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Why is monopoly bad : allocatively inefficient (due to reduced output, not monopoly profits. Monopolist"s profits: if consumer pays more to producer as a result of monopoly price: consumer worse off by , Producer better off by : transfer from consumer to producer. Who decides: welfare cost of monopoly is loss in total surplus as output is reduced. Perfect competition: p = mc allocatively efficient. Monopoly: p > mc not allocatively efficient. A = transfer of consumer surplus to monopolist. C = resources freed up to produce other goods. At qm, value to buyer > cost to seller. Natural monopoly: high fixed costs, low marginal costs. Barrier to entry is, in effect, economics of scale. Fixed cost: million (to construct the pipeline) Size of market: 4 million barrels of oil. Atc: 1 firm in industry (,000,000 + 4,000,000 x sh. 10)/4,000 = . 10. Atc: 2 firms in industry (equal market shares) (,000,000 + 400,000 x sh. 10)/2,000,000 = . 10.

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