Government intervention for monopolies Flashcards
What is a monopoly?
A monopoly is market dominated by one firm with over 25% market share. They make unique and supernormal products in the short and long run. They are a price maker and a source of market failure.
What is a price maximum?
A price maximum is a legally imposed maximum price in a market that suppliers cannot exceed. It is an attempt to prevent that market price from rising above a certain level. In order for price maximum to be effective. it needs to be set below the free market price.
Analyse the affect of a price maximum on a monopoly?
In the absence of a price maximum, the market equilibrium lies at PeQe. However, when the government intervenes the maximum price is capped at Pm whilst the supply contracts to M and the demand increases to N, hence creating a shortage of supply (N-M). Therefore, this will lower the profits of the monopoly and limit how much the firm can spend on investment in capital and research and development.
What are two disadvantage of a maximum price?
-The shortage of supply may lead to the existence of a Black Market where suppliers will sell their products illegally at a price much higher than the maximum price.
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