1. Market Failures and the Role of the Government
Unit 6:
Market Failures and the Role of the Government
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2. Market Failure #3 Monopolies

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

4. Antitrust Laws

5. What are Antitrust laws? Why are monopolies a Market Failure?
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.

6. Regulating Monopolies
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7. Why Regulate? How do they regulate?
Why would the government regulate an monopoly?
To keep prices low
To make monopolies efficient
How do they regulate?
Use Price controls: Price Ceilings
Why don’t taxes work?
Taxes limit supply and that’s the problem
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8. Where should the government place the price ceiling?
1.Socially Optimal Price
P = MC (Allocative Efficiency) OR
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
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9. Natural Monopoly
One firm can produce the socially optimal quantity at the lowest cost due to economies scale. P
It is better to have only one firm because ATC is falling at socially optimal quantity MC
ATC MR D Q
Qsocially optimal 9
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10. Natural Monopoly Unregulated Fair Return Socially Optimal P MC ATC MR
PFR
ATC
QSO MR D Q QM
QFR
Qsocially optimal 10
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11. Regulating a Natural Monopoly
What happens if the government sets a price ceiling to get the socially optimal quantity? P
The firm would make a loss and would require a subsidy MC
ATC
Pso MR D Q
Qsocially optimal 11
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ACDC Leadership 2015