Summary
Summary Chapter 4 - Allocative efficiency, imperfect competition and regulation
- Course
- Institution
Chapter 4 - Allocative efficiency, imperfect competition and regulation
[Show more]
Seller
Follow
Gauke107
Reviews received
Content preview
Chapter 4Allocative efficiency, imperfect competition
and regulation
Types of monopolies
Imperfect competition (IC) → market form that deviates from the perfectly
competitive (PC) market → market efficiency is only achievable in a PC market
(Pareto sense)
We don’t have PC markets → looking at impacts of IC markets have on market
outcomes and societal welfare and what government can do to correct it.
Statutory (artificial) monopoly → operates in a market where perfect
competition is technically feasible but prevented by legal restriction imposed
by government, professional bodies or entry-limiting behaviour done by firms.
o E.g. business licenses in place, limitations on patents by government
→ when the barriers are removed, they attract entries and move
towards perfect competition.
Natural monopoly → operates in a market where technical factors prevent
competition (usually there will only by one producer)
o Caused by expensive capital requirements to start up → excludes
those who cannot afford the start-up costs from competing.
o Cost structure is such that they produce along the decreasing part of
AC curve.
o E.g. Eskom.
Gauke Buyl DO NOT DISTRIBUTE
, 4.1 Social costs of statutory monopolies
Graph analysis
- Perfectly competitive equilibrium → point E where Qc (demand=supply) is
produced at Pc.
- Equilibrium F occurs under the monopoly → MR = MC → market produces
less at a higher price than at E (profit maximisation occurs)
- Loss in consumer surplus under monopoly = PmGEPc → straight transfer
from consumer to producer = PmGHPc → net welfare (deadweight) loss =
GEH.
MRPTxy = MCx/MCy = Px/Py
- From chapter 2
- Condition satisfied under perfect competition.
- When a monopoly is present → monopoly is producer Y → Py > MCy while
Px = MCx
o Violation of the second and third Pareto-optimality.
o Price charged by monopoly Y exceeds that priced by a non-monopoly
Y.
Gauke Buyl DO NOT DISTRIBUTE
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Gauke107. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $2.95. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
77333 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now