1. 1 ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

2. 2 Economic Efficiency and Public Policy Two Types of Efficiency (1) Productive Efficiency – Requires minimizing cost – Firms will produce at the minimum points of their long & short run ATC curve. – MC of last unit of production should be the same for all firms in industry. * (This insures that the total industry is cost-minimizing). Production Efficiency!

3. 3 Economic Efficiency and Public Policy Get productive efficiency under perfect competition. – not guaranteed under monopoly and oligopoly. – won’t get it under monopolistic competition. Perfect Competition Is Efficient...

4. 4 Economic Efficiency and Public Policy Two Types of Efficiency (2) Allocative Efficiency Pareto Optimality – A situation where you can’t make someone better off without making someone else worse off. – occurs when the MC of producing a commodity is equal to its price. – If P = MC, then the value consumers place on a commodity equals value of resources that go into its production.  get allocative efficiency only under perfect competition.

5. 5 Producer Surplus The difference between the price a producer is willing to supply a commodity for and the price the producer actually gets. P Q D S P* Producer Surplus

6. 6 Another Undesirable Feature of Monopoly Deadweight Loss CS = Consumer Surplus, PS = Producer Surplus Sum of CS + PS is maximized in perfectly competitive industry at Qo.Qo. CS PS – If you produce at Q 1, you will lose some of the surplus area. CS PS deadweight loss

7. 7 Competitive Industry That Gets Monopolized with Competition: Q C, PCPC with Monopoly : Q M, PMPM LOSSES: 1. Consumers lose ABC. 2. Producers lose DBC. 3. Consumer surplus under competition was P C FC. Consumer surplus under monopoly is P M FA. 4. P C P M AB is transferred from consumers to producers. 5. DAC is Deadweight Loss: a loss that is nobody’s gain. P MC (monopoly) =S(competition) QMQM D MR 0 PMPM PCPC A B Q QCQC C D F

8. 8 Natural Monopoly An industry where economies of scale are so important that there is only room for one firm operating efficiently (i.e. with very low ATC). Q D 0 MR Unregulated Monopoly : Q 1, P3P3 ATC MC P3P3 P2P2 P1P1 Q1Q1 Q2Q2 Q3Q3 Regulated to MC-Pricing: Q 3, P1 P1  Problem Regulated to AC-Pricing : Q 2, P2P2

9. 9 Natural Monopoly Regulations state that firms should make a “fair “fair rate of return” return” on their invested capital. Denominator is called “Rate Base”. Issue is : Replacement price versus purchase price. *Firms usually prefer replacement price.

10. 10 Antitrust Policy 1. Sherman Antitrust Act of 1890 Outlawed all “combinations and conspiracies which are a restraint on trade.” 2. Clayton Act of 1914 (a) Put limitations on price discrimination, interlocking directorates, and buying up the stock of a competitors. (b) Excluded unions from antitrust prosecution. 3. Federal Trade Commission Act of 1914 Established the Federal Trade Commission to oversee antitrust investigations and make recommendations to the Justice Department. * Conglomerate mergers (across industries) fall between the cracks of antitrust.

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