11. competition policy

Question 1

three ways gov uses act in markets

Answer 1

1. make monopoly-type markets more competitive
2. regulating the behaviour of existing monopoly markets
3. turning some private monopolies into public entities (and vice versa)

Question 2

how does gov make market more compet

Answer 2

disollawo mergers

When a merger= ‘good’ reasons (lowering costs), or ‘bad’ reasons (anti-competitive)

Question 3

define natural monopoly

Answer 3

one firm can supply the entire market at a lower average cost than two or more firms could.

Question 4

in natural monopolies, where does mc always lie, and what does this result in

Answer 4

MC curve always lies below the LAC curve.
• If unregulated, monopolist will set price and quantity where MR = MC… and earn economic profit of: [PU – LACU] x QU
•

However, this is inefficient, as MB (Price) > MC (good is under-allocated).

Question 5

how does gov regulate natural monopolies

Answer 5

marginal cost pricing
average cost pricing
two part pricing

Question 6

what is marginal cost pricing

Answer 6

• Govt regulates to ensure output is where P=MC.
• Benefits:
o allocative efficient;
o Maximises consumer surplus (green shade).
• Disadvantages
o Firm making a loss and so needs to be subsidised by govt.

Question 7

wha is average cost pricing

Answer 7

• Govt regulates to ensure output is where P=LAC.
• Benefits:
o No subsidy needed, as firm earns normal profit.
• Disadvantages:
o Not allocatively efficient
o Consumers pay higher price, and output less (PAC, QAC)