ECN 203 (9), Market Power and Market Failure

ECN 203 (9), Market Power and Market Failure - Chapter 9...

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Chapter 9: Market Power and Market Failure Purpose of chapter – a detailed examination of how Pareto Optimality can be distorted in a market economy by Market Power and Market Failure . Leads to Distortions between shares of the Social Endowment and Social Product of members of a society.
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Market Power Market Power – the process of exploiting an advantage to give an individual some control in the market. -- Distributes a larger share of the social product (production) of the economy to the powerful. -- Makes the economy less efficient, producing less social product than under GCE.
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Naturally Occurring Market Power Naturally Occurring Market Power – market power resulting from either the consumer’s initial endowment (gifts, talents, attributes), or the natural competitive process of business. Natural part of an economy.
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Naturally Occurring Market Power in the Labor Market Consider a labor market with a very high demand for a certain attribute. Now consider individuals who have this attribute more than anyone else (and it doesn’t have to be a lot more). The result – a large amount of market power for these individuals, and a very wage for them. E.G. – Michael Jordan, Julia Roberts.
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Naturally Occurring Market Power in Industry Take an industry which undergoes great Economies of Scale – large purchases of physical capital, leading to a large region of downward sloping Average Cost (AC) Significant increases in efficiency, lower average costs for high volume of production as a result. Drives many other businesses out. Creates Barriers to Entry – difficult for other businesses to enter to grab some of the positive economic profit.
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The Extreme Case Monopoly – industry characterized by one producer. Producer has driven everyone else
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ECN 203 (9), Market Power and Market Failure - Chapter 9...

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