Chapter 10 Flashcards
natural monopoly
when one company serves the entire market
average total costs decrease as level of output increases
market failure
when markets produce inefficient outcomes
2 government policies to reduce market failure
- public ownership
- regulation
crown corporations
government-owned business with economies of scale
public ownership
these are crown corporations
disadvantages of public ownership
they lack competitive pressure
regulation
this is when private businesses are regulated by the government
how do governments regulate private businesses?
governments set prices of products using a technique called “rate of return”
rate of return
a technique used by the government to set prices for private businesses being regulated
the price set allows the business to cover average total costs
nash equilibrium
when each player in a game makes their own best choice given the choice of the other player
collusion
illegal practices done to fool others
cartels
a group of businesses that maintains high prices and restricts competition
3 actions governments take against cartels
- The Competition Act
- criminal offences
- civil offences
The Competition Act
an act to maintain and encourage competition
disadvantages of The Competition Act
competitive behavior is an attempt to increase prices and gain the market power of a monopoly
It is hard to distinguish between this and The Competition Act
criminal offences
prison time is used to discourage cartels
civil offenses
these are actions taken against non-criminal offences such as mergers
mergers
combination of two businesses
actions taken against mergers
mergers are reviewed by a competition tribunal
two things the competition tribunal considers when taking action against mergers
- if the merger is decreasing competition in the market
- if the merger is increasing efficiency
terms for mergers to be approved by the competition tribunal
the merger is allowed if expected benefits are greater than expected costs.
the merger is denied if expected costs are greater than expected benefits
caveat emptor
“let the buyer beware”
buyers are responsible for checking the quality of a product before purchase
public-interest view of government regulations
this is when the actions taken by the government to reduce market failure benefit the public
capture-view of government regulations
this is when the actions taken by the government to reduce market failure benefit the business but not the public
government failure
this is when governments fail to serve the public interest
