Week9.Efficiency.2009 - ECMA04H Week 9 Efficiency in...

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1 ECMA04H – Week 9 Efficiency in competitive and monopolistic markets. Regulating natural monopoly. Objectives this week: - Review Consumer Surplus and Producer Surplus - Define Gain to Society (GTS) as a summary measure of net economic benefits - Discuss allocative efficiency in competitive and monopolistic markets - Discuss ways to regulate natural monopolies, including marginal cost pricing and average cost pricing First, complete our discussion of monopoly
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2 How much is the profit of the monopolist? Where is the monopolist’s supply curve? What about the long run?
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3 Is the monopolist efficient? Several perspectives: Does the monopolist minimize costs? Does the monopolist produce at q MES ?
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4 Is marginal benefit equal to marginal cost at the monopolist’s equilibrium output?
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5 Does the monopolist’s output maximize the Gain to Society? How do we measure Gain to Society (GTS)?
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6 What about the distribution of the benefits of production? Different from allocative efficiency. Does the monopolist transfer potential CS into profit for the producer?
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7 What about dynamic efficiency? Joseph Schumpeter – “waves of creative destruction”
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8 Classic view is that monopoly distorts resource allocation and causes deadweight efficiency loss. Monopolist produces too little output (uses too few resources). In practice, there are other considerations, to judge on a case by case basis.
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9 Where does monopoly come from? (a) cost advantage – economies of scale which are large relative to the size of the market (known as “natural monopoly”)
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10 (b) government licence or restriction (patent) (c) ownership of scarce but essential resource (d) some other barrier to entry (e.g., huge advertising costs, manipulation of access to market) (e) Cartel – Joint monopoly
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11 An excise tax on a monopoly. Solve it graphically. AC 0 MC Price per unit quantity Quantity produced per unit of time MR Demand
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12 Solve it algebraically. Place a $15 tax on the monopoly problem we had before. What is the effect on equilibrium price and equilibrium quantity? What is the effect on profit?
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13 What is the excess burden of the tax?
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14 Other thoughts about monopoly: Why is MR less than price for the monopolist?
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15 Think about elasticity and monopoly. Will a monopolist have elastic or inelastic demand? What is the “common sense” answer?
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16 This week’s problem: compare Monopoly to
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Week9.Efficiency.2009 - ECMA04H Week 9 Efficiency in...

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