Summary
Chapter 4 summary
- Course
- EKN 310
- Institution
- University Of Pretoria (UP)
Summary of 8 pages for the course EKN 310 at UP (Chapter 4 summary)
[Show more]
Seller
FollowContent 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.
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.
Notes by Georgia Taylor EKN 310 1
, MCx Px
MRPTxy = =
MCy 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.
R1
R0 C
Yc M3 M2
Quantity of Y
M0
Ym
M1
0 Xc Xm T0 T1 Quantity of X
Graph analysis:
- Line tangent to C → price ratio
- Pareto optimality (PO) → allocative and technical efficiency → C (competitive
equilibrium) on production possibility curve R0T0.
- Equilibrium moves to M0 (monopoly equilibrium) → prices charged for Y increase →
therefore quantity of Y drops (buying less of Y) and quantity for product X increases
Px
→ price ratio ≠ MRPT (MRPTxy > )
Py
- Distance between C and M0 → allocative inefficiency → too little of good Y
produced compared to good X at point M0.
o Reallocation of resources is needed → would increase production of Y
relative to X and move economy towards C.
- PmPm (green line at M0) → not tangent because of the monopoly (hypothetical
tangent tt (blue line)) → intercepts the PPC → leads to X inefficiency.
o Resources not used to their best possible means → society falls to a
consumption level of below the PPC (e.g M1) (violates PO condition) →
monopolies do not produce at the output they should (only provider in the
market and therefore no need to compete)
Arguments regarding efficiency of monopolies:
Against monopolies (Liebenstein)
- No incentive to cut costs or find better technology.
- Lack of incentive to maintain high labour productivity levels.
- Do not take sufficient time and effort necessary to acquire correct information.
- When monopolies fail to achieve PO allocation of resources → end at point M1
(point below the PPC).
Notes by Georgia Taylor EKN 310 2
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 EFT, 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 this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller georgiataylor. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R50,00. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
73918 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now