Monopoly pt2 Flashcards
Tax on monopoly profits
Tax on supernormal profits from monopoly power. However it could lead to tax avoidance and loss of capital investment spending.
Liberalisation of markets
Can break up monopolies and allow smaller businesses to increase contestability. However smaller businesses may struggle to scale up and compete
Introducing price capping policies
Encourages cost efficiency and increases consumer surplus. However monopolists may find revenue in other ways
Nationalisation
Takes some monopoly utilities back into public ownership. There is a possible loss of productive efficiency.
Monopoly vs contestable markets- Barriers to entry
Monopoly-high entry and exit costs
Contestable markets-Low as the absence of sunk costs makes market contestable
Monopoly vs contestable markets-Supernormal profit
Monopoly-High in the SR and LR
Contestable markets-Threat of entry limit profits so risk of hit and run entry
Monopoly vs contestable markets-Pricing power
Monopoly-May be limited by regulation
Contestable markets-Actual and potential competition affect pricing
Monopoly vs contestable markets-Economic efficiency
Monopoly-Low allocative (price>MC), productive (EOS) and dynamic (use of profits)
Contestable markets- Contestability should help move the market closer to efficient outcomes
Monopoly vs contestable markets-Innovative behaviour
Monopoly-Potentially strong
Contestable markets-Likely to be strong e.g. disruptive technologies.
Natural monopoly
When a single firm efficiently provides a good or service due to high fixed costs and a lot of EOS.
Natural monopoly graph
LRAC continuously falls and there is only room for one firm to exploit EOS. In this situation competition may actually increase prices. Natural monopolies increases RTS at every level of output. LRAC is falling because long run marginal cost is below LRAC.
