Ch. 7 – Market Structures There are 4 Market Structures (see next slide) They have to do with how much competition is in a given industry. –Ex.: lots of competition in the textile industry. Little competition in the oil industry. General rule of thumb = more competition is better b/c the consumer gets more choice, better quality, better prices when lots of firms are competing for your dollar.

Monopolies Natural Natural – market where avg. costs are lowest when output is produced by a single firm

Monopolies Geographical Has control because of its location or small size of the market

Monopolies Technological A firm owns or controls a scientific process or a manufacturing method or other scientific advance

Monopolies Government The gov. owns/operates the means of production and delivery of a good or service.

Market Failures What problems can arise from an unfettered free-market economy?

The absence of these conditions could lead to ‘market failure’: Adequate competition Adequate information Resource mobility Lack of Public Goods Externalities

Inadequate competition –Few firms dominate a given industry Example = The big 3 auto makers –They use their oligopoly power to restrict competition and restrict production »Leads to waste and abuse »Allows them to wield political power

Inadequate information –Information is power, especially in the marketplace. If a company reports false information, for example, investors may buy their stock without knowing that it’s risky.

Resource Immobility –If a large auto plant closes, do people move away to find new jobs? Many of the may stay there…unemployed. –While this may not lead to a catastrophe, the ‘marketplace’ is not functioning efficiently.

Positive or Negative Externalities When a third party is affected by a business transaction that he/she had nothing to do with Club EHS –Esperanza Burger becomes Club EHS! Who wins? –Positive Externality? »18 + crowd live close! »Other businesses surrounding it. Who loses? –Negative Externality? »Noise pollution (local residents) »Increased traffic/parking problems/drunk idiots

Public Goods Certain services and/or goods will not be provided b/c few are willing to pay for them –Roads, national defense, police, and fire protection So, gov. must provide these

So who is going to regulate the marketplace to prevent ‘market failures’? Thanks, Uncle Sam!

How? Promote Competition (Antitrust Legislation) –Sherman Antitrust Act Regulate natural monopolies –Set price ceilings on utilities, cable, and telephone companies Internalize Externalities –Tax companies who cause pollution. Force public disclosure –SEC forces companies to report accurate info.