Chapter 10 (WHY MARKETS FAIL)

Question 1

Natural Monopolies

Answer 1

Natural monopolies are a market failure challenge for policy makers and gain the low cost efficiencies of economies of scale but avoid the inefficiencies of monopoly’s restricted output and higher price

• an example of market failure and a challenge for policy makers
• are based on current technology. When technology changes, natural monopoly may change to more competitive market structures
• the two major policies governments use to deal with challenge of natural monopoly are public ownership and regulation

Question 2

Crown corporations

Answer 2

Publicly owned businesses in Canada. Achieve economies of scale, but lack of competition weakens incentives to reduce costs or innovate

Question 3

Rate of return regulation

Answer 3

Set prices allowing regulated monopoly to just cover average total costs and normal profits

Question 4

Game theory

Answer 4

A mathematical tool for understanding how players make decisions taking information account what they expect rivals to do

Ex: gasoline pricing is a strategic decision that can be understood using gaming theory

Question 5

Prisoners dilemma

Answer 5

A game with two players who must each make a strategic choice where results depend on the other players choice

2 smart choices based on lack of trust and trust:
- if other players CANNOT be trusted the smart choice is to CONFESS; all players are driven to the Nash equilibrium outcome where everyone confesses
- if other player CAN be trusted the smart choice is to DENY; all players are driven to the equilibrium outcome where everyone denies.

Question 6

Nash Equilibrium

Answer 6

Outcome of a game in which each player makes their own best choice given the choice of the other

TRUST

Question 7

Collusion

Answer 7

Conspiracy to cheat or deceive others

Question 8

Cartel

Answer 8

Association of suppliers formed to maintain high prices and restrict competition

Restricting output and raising prices

Ex: OPEC (organization of Petroleum Exporting Countries) is an international cartel that acts like a monopoly

Question 9

Competitive act

Answer 9

Attempts to prevent anti-competitive business behaviour and raises the expected costs to business of price fixing through prison time fines, legal prohibition relative to the expected benefits

Question 10

Criminal offences

Answer 10

Punished by prison time and fines
- price fixing, bid rigging, false/ misleading advertisisng

Question 11

Civil offenses

Answer 11

Punished by fines, legal prohibitions
- mergers, abusing dominant, market position, lessening competition

Question 12

Competitive tribunal

Answer 12

Legal body or court that weighs the costs of lessening competition against the benefits of any increased efficiences

Question 13

Caveat Emptor

Answer 13

“Let the buyer beware”
- the buyer alone is responsible for checking the quality of products before buying

Question 14

Public interest view

Answer 14

Government regulation eliminates waste achieves efficiency and promotes the public interest

Suggests gov actions improve market failure outcome

Prices rise when industries are deregulated

Question 15

Capture view

Answer 15

Government regulation benefits the regulated businesses not the public interest

Suggests gov actions produce gov failure

Prices rise when industry is regulated

Question 16

Government failure

Answer 16

When regulations fail to serve public interest

Market outcome: even with monopoly power is better than the government regulation if there is a significant government failure

Government outcome: especially with public interest regulations is better than the market outcome if there is significant market failure