Exam 5 (13, 14, 15, 16, 17) Flashcards
Why do consumers dislike monopolies?
because they have to pay a higher price
Monopoly profit comes at the expense of …
Consumers: CS is lower and DWL is created
What does the gov do to avoid DWL?
put in policy attempting to prevent or eliminate monopolies (antitrust policy)
Oligopoly (def)
a market that is dominated by a small number of firms
Oligopoly Behavior (2 options)
- Compete against each other (by picking different quantity supplied and/or price charged)
- Cooperate to raise each others profits (known as collusion which is illegal in the US)
How do you measure an oligopoly?
using the Herfindahl-Hirschman Index (HHI)
HHI < 1000
strongly competitive market
HHI 1000 - 1800
somewhat competitive market
HHI > 1800
oligopoly
Monopolistic competition characteristics
- Many firms **
- Differentiated Product
- Free entry and exit in the long run **
* * = same as perfect competition
Ex of monopolistic competition
restaurants
How do monopolistically competitive firms gain market power?
product differentiation
3 Forms of Product Differentiation
- Differentiation by style or type
- Chinese food vs pizza
- sedans vs SUVs - Differentiation by location
- dry cleaner near home vs cheaper dry cleaner far away - Differentiation by Quality
- ordinary chocolate vs gourmet chocolate
Monopolistic competition demand curve is
downward sloping
Short-run maximization of profit (monopolistic competition)
- Produce the Q at which MR = MC
- Set price according to D curve
* Profit is the area between price and ATC (where quantity hits the demand curve and the ATC curve)
* Pos. profit attracts new entrants (so it won’t last)
Long run positive profit (monopolistic competition)
Positive profit = new firms enter the market; new entrants means fewer customers for the original firms: Demand and MR shift left
So, in the long run profit = 0
Long run equilibrium (monopolistic competition)
new entry stops
Long run negative profit (monopolistic competition)
loss = some firms exit industry; exit of firms means more customers for the remaining firms: Demand and MR shift right
Anytime the ATC is above the demand curve …
the firm is making losses so firms will exit industry
Anytime the ATC is tangent to D curve …
you know that the market is already in equilibrium
For perfect competition, break-even point is at …
price = lowest point on ATC
Long run equilibrium (monopolistic competition)
don’t produce at minimum cost output; firms in a mon. comp. industry produce less than the output at which avg total cost is minimized
External cost/benefit (def)
uncompensated cost/benefit imposed by an individual or firm on others
Externality (def)
an action that imposes an external cost or external benefit on others
Examples of negative externalities
- air and waste pollution
- texting while driving
Examples of positive externalities
- flu shot
- preserved farmland
MSC of pollution
additional cost imposed on society by an additional unit of pollution
MSB of pollution
additional gain to society from an additional unit of pollution
The socially optimal amount of pollution is …
not zero; it is at where MSB = MSC
Market failure
market equilibrium not providing the socially optimal amount of a good (pollution is an example of this)
In a market economy w/o gov. intervention the owners of the companies decide how much pollution occurs w/o accounting for …
costs of pollution
Policies for pollution
- Impose an emissions tax on polluter
- -Pigouvian tax - Impose an environmental standard
- -polluter isn’t allowed to exceed a certain amt of pollution - Introduce tradable emissions permits
Pigouvian tax (def)
taxes designed to reduce external costs
Set optimal pigouvian tax equal to …
MSC @ socially optimal quantity
–the pigouvian tax is a marginal cost to the polluter
Pigouvian subsidy
a payment designed to encourage activities that yield external benefits
To achieve socially optimum, set Pigouvian subsidy equal to …
MSB @ the optimal quantity
Characteristics of goods
- Excludable: suppliers of the good can easily prevent people who don’t pay from using it
- Rival: the same unit of the good cannot be consumed by more than one person at a time
Private Goods
Excludable and rival
–ex: snacks and bathroom fixtures
Artificially scarce goods
Excludable and non rival
–ex: on-demand movies and computer software
Common Resources
Non excludable and rival
–ex: ground water and fish in the sea
Public goods
Non excludable and non rival
–ex: fire-protection and national defense
The free-rider problem
individuals are unwilling to pay for a good and will take a free-ride on anyone who does pay
With which type of good does the free-rider problem occur?
public goods
If the gov provides the public good, how much should it supply?
a quantity where MSB = MSC
HHI formula
the sum of the squares of each firm’s share of market sales
Ex: 3 firms have 60%, 25%, and 15%
HHI = 60^2 + 25^2 + 15^2 = 4450
What is the importance of product differentiation in monopolistic competition?
It allows firms to charge a different price (exercise market power)
