Chapter 2

Question 1

Reasons for market power and monopolies

Answer 1

1. Segmented markets through transport costs and tariffs
2. Patents
3. Government concessions
4. Collusion (Cartels)
5. Natural monopolies due to economies of scale

Question 2

Options for Government intervention

Answer 2

1. Control of mergers
2. Enforcement of split ups
3. Penalties for cartels
4. Enforcement of net access
5. Price Cap
6. Rate of return regulation
7. Subsidies
8. Auction of monopoly rights

Question 3

Price Cap

Answer 3

Leads to a jump in the marginal revenue curve

Question 4

Subsidies

Answer 4

Shifts effective marginal cost function DOWNWARD and increases output

• Disadvantage: High budgetary cost for government
• Advantage: Possible with natural monopoly

Question 5

Auctioning

Answer 5

• Government can try to extract monopoly rent by having an auction for some scarce licenses
• Advantage: auctioning avoids inefficient rent seeking expenditure
• Disadvantage: auctioning does not prevent that the winning bidder produces the monopoly output only

Question 6

Excludability

Answer 6

A good/service is called excludable if it is possible to prevent people (consumer) who have not paid for it, from having acces to it

Question 7

Rivalry

Answer 7

A good is said to be rivalrou if its consumption by one consumer prevents simultaneous consumption by other consumers or reduces the ability of another party to consume

Question 8

Excludability-Rivalry Matrix

Answer 8

Question 9

Optimal number of a PUBLIC GOOD

vs. Optimal number of a PRIVATE GOOD

Answer 9

PUBLIC GOOD:

Samuelson Rule: MWP1 + MWP2 = MC

-> SUMMIEREN DER PREISE

• Public Good must be consumed in equal amounts

PRIVATE GOOD:

MWP1 = MWP2 = MC

-> Summieren der MENGE

Question 10

Mechanismen to partly overcome the public good problem

Answer 10

• small, homogenous groups
• repeated interaction
• soical norms
• organizations provide private next to public goods (ADAC

Question 11

What is the public good problem

Answer 11

Insufficient incentives to provide the public good, because of an asymmetry between cost and benefit

• cost of provision is private
• Benefit is public and is spread among ALL USERS
• private proviso: MWP = p
• Inefficiency is increasing in group size

Question 12

Pigouvian Tax

Answer 12

MAC1(S1) = t = MD = MAC2 (S2)

• It is in the best interest of each polluter to equalize MAC and the tax
• If polluter face the SAME tax rate, environmental improvements will be attained in a cost minizminzing way
• NO COST EFFICIENCY WHEN TAX RATES DIFFER