Chapter 4
Allocative 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
Allocative 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
