Market Failure #3 Monopolies 1. Monopoly Monopoly Review 1.Draw a monopoly making a profit. Label price, output, and profit. 2.Identify three specific.

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Presentation transcript:

Market Failure #3 Monopolies 1

Monopoly Monopoly Review 1.Draw a monopoly making a profit. Label price, output, and profit. 2.Identify three specific reasons why monopolies are bad. 3.Label the Fair Return price and output. 4.Label the Socially Optimal price and output. 5.Explain why taxing a monopoly is a bad idea. 2

Antitrust Laws 3

What are Antitrust laws? Antitrust Laws- Laws designed to prevent monopolies and promote competition. After the Civil War, advances in technology and transportation lead to national markets. Eventually only a few firms began to dominate industries: Railroads, Steel, meatpacking, coal, etc. Sherman Act of “Every person who shall monopolize …or conspire to monopolize…shall be deemed guilty of a felony.” Why are monopolies a Market Failure? Monopolies destroy the key ingredient of the free market system- Competition. To fix this MARKET FAILURE the government must get involved. 4

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Regulating Monopolies 8 Copyright ACDC Leadership 2015

How do they regulate? Use Price controls: Price Ceilings Why don’t taxes work? Taxes limit supply and that’s the problem Why Regulate? Why would the government regulate an monopoly? 1.To keep prices low 2.To make monopolies efficient 9 Copyright ACDC Leadership 2015

1.Socially Optimal Price P = MC (Allocative Efficiency) Where should the government place the price ceiling? 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit) OR 10 Copyright ACDC Leadership 2015

Q D MC ATC P Natural Monopoly 11 Q socially optimal One firm can produce the socially optimal quantity at the lowest cost due to economies scale. It is better to have only one firm because ATC is falling at socially optimal quantity Copyright ACDC Leadership 2015 MR

Q D MC ATC P Natural Monopoly 12 Q socially optimal Copyright ACDC Leadership 2015 Unregulated Socially Optimal Fair Return QMQM Q FR PMPM P FR Q SO

Q D MC ATC P Regulating a Natural Monopoly 13 Q socially optimal What happens if the government sets a price ceiling to get the socially optimal quantity? The firm would make a loss and would require a subsidy P so Copyright ACDC Leadership 2015 MR

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