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ECO 211 Chapter 13.pdf

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University of Miami
ECO 211

Chapter  13  Monopoly Not  all  market  structures  are  perfectly  compe▯▯ve Not  always  alloca▯vely  efficient   Compe▯▯on  and  Efficiency w Alloca▯ve  efficiency    occurs  when  no  resources  are  wasted. w This  means  no  individual  can  be  made  be▯er  off  without  making  someone  else  worse  off. w In  the  absence  of  any  obstacles,  perfect  compe▯▯on  leads  to  alloca▯ve  efficiency. Obstacles  to  Efficiency w The  three  main  obstacles  to  achieving  alloca▯ve  efficiency  are: § Public  goods  (na▯onal  defense) § Externali▯es  (external  costs  and  external  benefits) § Monopoly  power § Market  power  other  than  monopoly  (oligopoly  +  monopolis▯c  compe▯▯on) Dead  weight  loss  in  all  4 First  2  because    type  of  good Last  2  type  of  firm Obstacles  to  Efficiency w Public  goods  are  those  that  can  be  consumed  simultaneously  by  everyone  and  from  which  no  one  can  be   excluded,  i.e.  city  park,  na▯onal  defense w Externali▯es  occur  when  costs  or  benefits  are  conferred  on  other  members  of  society. w Monopoly  power  is  the  absence  of  compe▯▯on. You  can’t  exclude  people  who  aren’t  paying  for  the  good  from  consuming  it-­‐  free  riders   Unregulated  monopoly  is  illegal Colluding  cartel  (acts  like  a  monopoly)-­‐  OPEC It  is  illegal  to  ▯e  products  together  that  leaves  the  consumer  without  op▯ons   Public  Goods w Public  goods  cannot  be  provided  efficiently  by  the  private  market  because  of  the  free  rider  problem. w A  free  rider  is  someone  who  consumes  a  good  without  paying  for  it.   w Because  people  can  consume  a  public  good  without  paying  for  it,  no  one  has  the  incen▯ve  to  pay  for  it. w Thus,  the  government  has  to  provide  the  good  and  tax  everyone  to  pay  for  it. Externali▯es w External  costs  are  costs  not  borne  by  the  producer  but  borne  by  other  members  of  society. § Pollu▯on  imposes  external  costs. w External  benefits  are  benefits  accruing  to  people  other  than  the  buyer  of  a  good. § Educa▯on  confers  external  benefits. w Some  goods  produce  both  external  benefits  and  costs  (e.g.,  public  gardens) Nega▯ve  externality  (external  costs) Posi▯ve  externality  (external  benefit)   Consequences  of  Externali▯es w When  there  are  external  costs,  such  as  pollu▯on,  too  much  of  the  good  is  produced  in  the  private  market w When  there  are  external  benefits,  such  as  from  educa▯on,  too  li▯le  of  the  good  is  produced  in  the  private  market w In  both  cases,  government  interven▯on  is  warranted  to  induce  less  or  more  of  the  good  to  be  produced. Possible  Government  Ac▯ons  to  Deal  With  Externali▯es w In  the  case  of  external  costs,  tax  the  private  producer  or  directly  restrict  produc▯on. w In  the  case  of  external  benefits,  subsidize  the  producer  or  directly  provide  the  good. Monopoly w A  monopoly  is  an  industry  that  produces  a  good  or  service  for  which  no  close  subs▯tute  exists  and  in  which  there  is   one  supplier  that  is  protected  from  compe▯▯on  by  a  barrier  preven▯ng  the  entry  of  new  firms. § Difficult,  almost  impossible,  for  new  firms  to  enter  the  industry Key  to  market  power  is  barrier  to  entry Examples  of  Monopoly w  Examples  of  monopolies  include: § Local  telephone  service  (Bell  South) § Water  service  (Metro-­‐Dade) § Cable  television § The  U.S.  Postal  Service  (regular  mail) § Local  Electric  Power  (FPL) § Microso▯  (?) No  Close  Subs▯tutes w If  there  are  close  subs▯tutes  for  a  good  or  service,  that  means  there  is  compe▯▯on  in  the  market. w Compe▯▯on  in  the  market  means  the  market  cannot  be  a  monopoly  by  defini▯on. Innova▯on,  Technological  Change,  and  Subs▯tutes w Innova▯on  and  technological  change  create  new  products,  some  of  which  are  subs▯tutes  for  exis▯ng  products. w Example:    FedEx,  UPS,  fax  machines,  and  e-­‐mail  are  subs▯tutes  for  the  services  of  the  U.S.  Postal  Service,   weakening  their  monopoly. w Example:    Satellite  TV  is  a  subs▯tute  for  Cable  TV,  weakening  its  monopoly. Barriers  to  Entry w Barriers  to  entry  are  legal  or  natural  impediments  protec▯ng  a  firm  from  compe▯▯on  from  poten▯al  new  entrants. w Barriers  to  entry  include: § Legal  barriers § Ownership  barriers § Natural  barriers w Of  course,  firms  can  create  illegal  barriers  to  entry,  but  this  would  be  a  viola▯on  of  the  Sherman  An▯trust  Act. Legal  Barriers  to  Entry w Legal  barriers  to  entry  create  legal  monopoly. w A  legal  monopoly  is  a  market  in  which  compe▯▯on  and  entry  are  restricted  by  the  gran▯ng  of  a  public  franchise,   license,  patent  or  copyright,  or  in  which  a  firm  has  legally  acquired  ownership  of  a  significant  por▯on  of  a  key   resource. Legal  Barriers:    Public  Franchises  and  Licenses w A  public  franchise  is  an  exclusive  right  granted  to  a  firm  to  supply  a  good  or  service. § Example:    U.S.  Postal  Service,  Cable  TV,  FPL w A  government  license  controls  entry  into  par▯cular  occupa▯ons,  professions  and  industries. § Example:    licensing  of  medical  doctors  and  lawyers. Legal  Barriers:    Patents  and  Copyrights   w A  patent  is  an  exclusive  right  granted  to  the  inventor  of  a  product  or  service.    Patents  are  good  for  20  years. w A  copyright  is  an  exclusive  right  granted  to  the  author  or  composer  of  a  literary,  musical,  drama▯c,  or  ar▯s▯c  work. Natural  Barriers  to  Entry w Natural  barriers  to  entry  give  rise  to  natural  monopoly. w Natural  monopoly  occurs  when  one  firm  can  supply  the  en▯re  market  at  a  lower  price  than  two  or  more  firms. w Demand  must  limit  sales  to  a  quan▯ty  at  which  economies  of  scale  exist. Natural  Monopoly,  Demand  and  Average  Total  Cost w The  demand  curve  must  intersect  the  industry  ATC  curve  on  a  part  of  the  ATC  curve  that  is  sloping  downward. w If  two  or  more  firms  supply  the  market,  the  per  unit  cost  will  be  higher  than  will  be  the  case  if  a  single  firm   supplies  the  en▯re  market. Natural  Monopoly Variable  costs  are  small  capital  –  intensive  firms Demand  for  each  firm:  ½  of  this  demand  curve Examples  of  Natural  Monopoly w Examples  of  natural  monopoly  usually  involve  economies  of  scale  in  distribu▯on: § Natural  gas  distribu▯on  systems § Electric  power  distribu▯on § Trash  collec▯on Monopolies  are  Regulated w Most  monopolies  are  regulated  in  some  way  by  one  or  more  government  agencies. w In  the  case  of  unregulated  monopolies,  the  government  must  either  break  up  the  monopoly  or  make  some  other   change  to  promote  compe▯▯on  and  economic  efficiency. w First,  we  study  the  opera▯on  of  unregulated  monopoly  and  how  it  differs  from  the  opera▯on  of  compe▯▯ve   markets. w Then  we  discuss  pricing  strategies  for  regulated  monopolies. Monopoly  Price-­‐Se▯ng  Strategies w Price  discrimina▯on  is  the  prac▯ce  of  selling  different  units  of  a  good  or  service  for  different  prices.  (
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