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Internal economies of scale -- Savings in cost as rm expands. Created by rms own policies and actions.

All must link back to lowering AC

1. Technical Economies of scale (Technical and engineering factors) Factor indivisibility Economies Make full use of large equipments Economies arising from increased dimensions Larger dimensions. Container principle>>Doubling of area more than doubles the volume linked process economies Takes a product through several stages of production, saves transport cost Specialisation and division of labour less training, more efcient by product economies waste of one = input of another 2. managerial economies of scale expertise of professionals streamlines the work processes. division of work increases experience within their own area decentralisation of decision making saves time. 3. marketing economies buy materials in bulk, saves unit cost of transportation. dictate their price, quality and delivery. large scale advertising, cost spread over larger volume of sales. 4. nancial economies more collateral, obtain larger loans at lower interest rates raise capital through issuing bonds and share to the public and public have more condence in large rms 5. risk bearing SEA HIST advantage in bearing non insurable rise through diversifying their output or develop new markets supply side >> obtain different sources to guard against crop failures for instance. 6. RnD economies RnD involve high initial capital outlay. The cost can be spread over larger output if rms expand. Improve in techniques, lowers AC

7. Welfare Economies larger rms able to improve workplace environment to encourage higher productivity. which is a rise in output per worker which leads to lower unit of cost of production. 8. economies of scope per unit COP fall over an increased range of products as overhead costs are shared among products. Internal diseconomies of scale 1. Complexity of management principle agent problem >> ownership and management become more divorced. bad coordination between entrepreneurs and managers. large rms have extensive red tape slows down decision making process 2. strained relationship worker lack loyalty to the rm >> sloppy attitude and work. lower productivity and increase AC External economies of scale >> Lower AC due to increase in size of industry or concentration of rms in one location. Shift down LRAC 1. economies of concentration --- when rms concentration in one area availability of skilled labour demand for a particular type of skill is large enough, special educational institutions can be set to train people in such skills. Firms can join together to develop such institutions reduce cost of training workers well developed infrastructure roads, airports, public utilities also set up to cater to the industries. reduce AC of individual rms. reputation builds up reputation and consumers associate it with quality. encourages brand loyalty and saves money on advertising. 2. economies of disintegration b. subsidiary industries will be developed to cater to needs of major industry. Lower AC. ii. producing input for larger industry. iii. process waste products for larger industry >> who sell it at a prot 3. economies of information b. save on RnD. increase productivity of individual rms. External diseconomies of scale

1. Increased strain on infrastructure a. concentration of rms in a geographical region taxes infrastructural heavily. i. trafc congestion increase AC of transport >> time and fuel consumption 2. Rising factor costs a. shortage of raw material and rms have to compete for them. DD rise, P rise. Minimum efcient scale varies with different rms. Methods of growth 1. growth by internal expansion a. increase number of existing product or extending range of its product with bigger plant 2. growth by merger or acquisition a. vertical integration i. backward >> rm merges with previous stage of production, greater control over raw material quantity and quality, absorb intermediate prot margin, ii. forward >> rm merges with later stage of production, secure market outlets b. horizontal integration i. same stage of production. for market dominance, reduce competition, increase market power c. conglomeration >> combo of rms not directly related. diversication and reduce risks of uctuation in demand in certain markets.

Existence of small rms Demand 1. nature of product a. perishable product b. preference of variety over standardisation >> fashion item c. specialised product >> highly specic machines like science equipments 2. geographical limitations a. product is bulk in relation to value. transport cost large proportion of TC, might as well save the transport by nding local market to remove the need for transport.

Supply side 1. MES at low output a. Diseconomies can occur at low level, hence low MES i. services that require personal attention, dentistry, tailoring b. economies of scale quickly exhausted i. large and small rm coexist ii. saucer shaped LRAC 2. vertical disintegration a. entire production process break into small series of separate processes. hence small rms perform different task 3. low entry barriers -- easy for small rm to enter 4. difculty in raising capital a. no choice but to remain small b. entrepreneurs prefer to be sole proprietor like family business 5. unwillingness to take greater risks a. large rm = large capital outlay i. higher expenditure ii. risks of investment higher b. fear of future fall in price of nal product i. expansion = increase in supply >> , without a rise in market (demand quantity), fall in price of product 6. banding a. independent businesses band together to gain advantages of bulk buying and advertising but retain independence 7. prot cycles a. early stage of product cycle (new stuff come and go) total demand small and hence rm take time to grow 8. non prot maximisation attitudes a. value independence, maintain family control. . . Spectrum of competition Characteristics determining market structure 1. Number of rms a. concentration ratio: size of biggest 3 4 5 rms relative to the market. 2. nature of products a. homogeneous or differentiated

3. knowledge of market 4. extent of barriers to entry a. limit the amount of competition Prot maximisation: The Marginalise Principle 1. MC = MR 2. MC Must be rising

PC 1. characteristics a. large number of buyers and sellers i. individual buying or selling small amount of good and cannot inuence price b. homogeneous product i. buyers wont show preference c. perfect knowledge d. no barriers to entry i. factors of production perfectly mobile, machines and workers can easily switch 1. no rm has cost advantage over the other as all materials are same cost ii. no transaction or transportation cost iii. xed cost low iv.normal prots in long run 2. impact on behaviour a. PC rm is price taker i. price determine by market demand and supply ii. demand for individual rm is perfectly elastic (many same substitutes, cannot raise price) iii. P=AR=MR 3. SR prots >> Sub, Normal, Super 4. LR prots normal a. no barriers to entry or exit i. SR Supernormal prot, rms enter, market supply rise, market price falls due to surplus, supernormal prot eroded, some rms exist, remaining ones left iwth normal prot

Monopoly (depends on how narrowly industry is dened) 1. characteristics a. 1 producer, dd curve of rm = dd curve of industry i. dd curve downward sloping, cannot increase price and output at the same time ii. impact 1. price setter, restrict supply to up the price b. no close substitutes for product i. cross elasticity and price elasticity are low, inelastic ii. impact 1. price setter a. lack of competition, restrict output up the price i. price discrimination even c. high barriers to entry i. monopoly can retain supernormal prots in long run as rms cannot enter freely ii. natural batteries due to huge internal economies of scale 1. articial barriers too iii.impact 1. able to invest in RnD due to prot. but due to lack of competition its unwilling to do so d. consumers no perfect knowledge i. rms guard technology with patents 2. barriers to entry a. natural barriers from internal economies of scale i. large MES, low AC, new entrants who are smaller will incur higher unit cost of production initially, disadvantaged ii. huge total xed cost>> power and utilities, airlines need airplanes 1. AFC spread over large output, MES huge. Natural monopoly because market demand is large enough only for one rm to operate efciently. iii. monopoly can reduce cost to ward off potential entrants b. articial barriers i. product differentiation >> cultivate consumer loyalty 1. intensive advertising, cost a lot, deter newbies 2. RnD to improve production process or develop new product ii. attaining legal protection like exclusive rights>> patent, copyrights, licenses, iii. gaining control over supplies of essential raw materials through backward integration

iv.dumping >> pricing goods overseas lower than rms MC to gain foothold in market v. collusion amongst incumbent rms vi.merger and acquisition to reduce competition 1. rms can expand in size and gain greater internal economies of scale, larger market share and benet from larger product range. 3. SR Prots>> SubN SupN N a. Sub normal i. continue production as long as TR can cover Total variable cost 4. LR Prots >> LRMC = MR, TR > TC Oligopoly >> few rms who are interdependent 1. characteristics a. few rms each command a large proportion of the market share and have strong monopoly power. i. DD curve downward sloping >> Price setters ii. degree of oligopoly power measured with market concentration ratio 1. 3,4,5 rm concentration ratio iii.impact on behaviour 1. every action taken by any single rm will affect all other rms in the market 2. hence the mutual interdependence b. homogeneous products i. pure oligopoly ii. theoretically only one price can prevail, but since rms dd not perfectly price elastic, rm can still control price c. differentiated product i. imperfect oligopoly 1. less fear of immediate reaction from rivals because change in price can be a modication of product 2. but still interdependent d. huge barriers to entry i. articial and natural (internal economies of scale) e. imperfect knowledge i. both sellers and buyers have imperfect knowledge ii. can use as a form of barriers to entry, increase price setting ability

2. competitive model a. pricing behaviour i. rigid prices -- kinked demand curve, elastic above, inelastic below 1. due to interdependence 2. rise in price will not be followed, drop in price will be matched. a. quantity demanded fall by more than proportionate b. quantity demanded will rise by less than proportionate c. hence not benet d. kinked curve, if MC rise within the discontinuous region, rms have to absorb it and cannot pass it on to consumers. e. but still have a bit price setting ability i. the less differentiated the product, the greater the fear of rival actions ii. price competition 1. not the preferred means of competition 2. only happen when there is considerable excess capacity in industry. likely to be initiated by rm with largest MES >> lowest AC, when rivals are driven out, remaining ones will gain larger market share and greater market power 3. not sustainable due to inevitable loss b. non pricing behaviour i. differentiate their products 1. real physical differences a. innovation >> goods to differ in some minor ways>> methods or material in production changes 2. imaginary differences a. marketing techniques>> advertising and packaging i. build customer loyalty 1. make dd less p elastic, give rm greater leeway to raise prices without fear of loss of market share 3. different conditions of sale a. quality of service, location ii. require huge RnD, large scale advertising 1. they have large prots anyway

3. cooperative model - collusive oligopoly a. formal or informal agreement among rms to set price and divide market share to reduce unpredictability of rivals reactions i. agree output quotas ii. x prices iii. limit on product promotion or development iv.agree on not to poach each others markets v. Cartels 1. members formally collude to set high price by restricting total industry output a. each rm is given production quota b. cartel MC = total MC, prots at MC = MR 2. divide market, usually according to current market share 3. incentive to cheat a. thus agreement are fragile i. members can produce beyond quota, poach on each others markets, b. tacit collusion : price leadership i. unwritten rules of collusive behaviour ii. rms dont engage in price cutting or excessive advertising or other forms of competition iii. market leader s price is accepted as the market price >> deemed as best way of protecting or increasing their prots, price is stable iv.leader initiates a change, other follow. Leader hence select the price and output combo that will max its prots. Result is similar to monopoly or collusion c. So collude or Compete? i. incentive to compete to gain larger market share 1. but drives down price, advertising also wastes money, prot margin lowered a. collude then :) i. but theres incentive to cheat!

MC no market DD curve, many price can prevail 1. characteristics a. large number of buyers and sellers due to low BtE i. impact 1. collusion not possible, 2. pricing competition a. one rm lowers price, it gains in sales revenue, others loss, but total loss is spread over many rms, hence each rm suffers a negligible amount, thus less likely to retaliate b. each rm can therefore determine its own price output strategy 3. non pricing a. differentiating their produces i. but due to little prot, it cant engage large scale RnD or advertising b. differentiated products i. impact 1. some degree of control over its prices 2. DD curve for rm is downward sloping 3. but because there is large number of substitutes out there, price is elastic a. limits the market power of MC rm b. their products have to be differentiated c. low or no barriers to entry i. factors of production mobile, start up cost low, technology easy to copy ii. LR normal prots because low BTE iii.impact 1. normal prots restrict ability of rms to engage in large scale adv or RnD a. but presence of close substitutes makes differentiating necessary b. hence small scale adv or RnD (little innovations) d. imperfect knowledge 2. SR prots>> Sub Sup N 3. LR prots N a. same as PC. initial SR Sup prot, new rm, more supply of close subs, DD for each rm falls, AR curve shifts and gets more elastic,

Assessing performance static efciency: efciency at a point in time. how much output can be produced from a given stock of resources at a given point in time. 1. Allocative efciency - P = MC, Maximise societys welfare with the right mix and quantities of goods and services. Max consumer and producer surplus. Assume absence of third parties and public good. 2. Productive efciency - resources are used to maximum capacity >> All points on PPC a. societys pov -- occurs at LRAC minimum, rm operating at MES. b. rm pov -- any point on LRAC are productively efcient because it represent lowest possible AC at each given level of output. i. above LRAC its X inefcient 3. Dynamic efciency (innovation) a. improvement of level of technology >> better quality output, new products or production methods i. fall in unit cost of every level of output >> LRAC shifts down b. but involves uncertainty >> may not produce innovation 4. equity fairness in distributing income, wealth and opportunity a. involves value judgement: equity in terms of i. equality of distribution ii. distribution based on 1. effort 2. contribution 3. need 5. consumer choice a. desirable that consumers be given the freedom to choose from a variety of goods and services, purchase similar goods from different producers

PC VS ImPC 1. Allocative efciency a. PC - price taker with horizontal dd curve -- AE i. P = MC = MR b. ImPC - price setter with downward sloping dd curve -- not AR i. P = MC > MR ii. also will have higher price than price setter 2. Productive efciency a. PC -- PE i. MES otherwise it will be at a loss b. ImPC -- - not PE from society pov, but can be PE from its own POV i. not necessarily MES PC VS MONOPOLY 1. AE a. PC - AE i. P = MC b. Monopoly - not AE i. prot max equilibrium MR = MC , lower output and higher price. ii. society POV, monopoly underproduce, for each unit underproduced, the benet outweighs the opportunity cost of consuming the additional unit. 1. results in deadweight welfare loss 2. PE a. PC - PE i. rm operating at MES, being price taker, rm has to be as cost efcient as possible to max prots or else theyll loss money b. Monopoly - may or may not PE i. can produce at MES but usually its coincidence if it ever happen ii. it can afford to be X inefcient because it can make supernormal prot iii. but monopoly can face global competition without protectionist barriers , it better be x efcient. c. but monopoly is more desirable if the industry has got substantial economies of scale to be reaped. where MES is high, monopolist can enjoy signicant internal economies of scale. MC will be lower than that of PC. consumers can enjoy lower price despite monopoly selling at a price above its MC

3. equity a. PC i. spread opportunities and wealth widely and more evenly because no BTE ii. Consumer surplus is maxed at P=MC iii. but PC do not rectify preexisting inequity b. monopoly i. exacerbate inequity as supernormal prots concentrated in hands of few who can block potential entrants ii. consumer pay high prices for limited quantity of goods 1. but again monopoly can have large internal economies of scale, consumer surplus may increase because of lower price 4. dynamic efciency a. PC i. no incentive for RnD 1. assumption of perfect info a. innovation gets replicated by competitors hence discourage RnD since rms cannot reap benets from it 2. long run normal prots a. limit ability to perform RnD 3. homogeneous product >> means no RnD a. but in real world, competition does drives RnD b. monopoly i. can innovate but less willing to do so 1. huge bte, their dominance is secured, a. unless there is contestable markets 2. innovation erode value of preexisting products ii. but it can 1. lR Supernormal prots 2. threat of potential entrant a. creative destruction theory i. BTE stimulate creativity to destroy BTE 5. consumer choice a. PC i. no product variety since goods are homogeneous ii. choice many producers though

iii. PC react to consumer demand >> there is consumer sovereignty b. Monopoly i. product is unique, hence no consumer choice, nor is there choice of producer ii. consumer sovereignty is limited 6. limitation of PC a. static model i. optimum now may be sub optimum in future, especially with slow innovation b. third party cost and benets (externalities) & public goods i. PC wont deliver optimum allocation of resources c. lack of variety of products d. lack of LRSupernormal Prots i. no RnD ii. lure of prots can induce rms to produce at lowest AC 7. theory of contestable markets >> real threat of competition determines price & output a. contestable markets i. perfectly contestable when BTE is zero. Supernormal prots will attract new rms, this drives down prot ii. threat of this possible entrants will induce incumbent rms to 1. keep prices down so only normal prot can be made. prices moves towards MC... AE 2. produce as efciently as possible, move towards X efciency ... PE 3. otherwise potential competition will become actual competition b. hit and run competition i. enter market for short period of time when prots are high and withdraw 1. prevents incumbent rms from charging high price during peak seasons c. hence, monopoly can behave competitively as well and price its produce low. Supernormal prot may not be that large i. inefcient rms cannot survive in the long run ii. this encourages rm to act like PC iii. government should make markets more contestable by lowering BTE Assessing Oligopoly 1. AE a. P>MC i. worsened if they collude ii. but their price setting ability is limited by their mutual interdependence

b. oligopolistic competition are wasteful i. advertising to differentiate their products are wasteful, these resources could have been used to produce more GnS. misallocation of resources ii. wasteful duplication 1. rms compete for majority of population with same GnS, neglect minority wants, as majority promises more prots 2. monopoly would not have such scenario, it will produce for all 2. PE a. X inefcient due to LRSNP b. but can reap large IEOS better than small rms. AC lower than PC 3. equity a. exacerbate inequity as LRSNP concentrated in hands of few b. anti competitive behaviour like collusion and price discrimination worsen inequity, reduce consumer surplus 4. Dynamic efciency a. encourage innovation, more than monopoly i. existing competition induces them to RnD to differentiate products 1. so that they can reduce fear of rival actions or reactions to their pricing strategy ii. signicant BTE, they have LRSNP if the innovate b. collusive oligopoly have slow innovation due to lack of competition or potential entrants 5. CC a. theres is product differentiation b. but oligopolists tend to engage in multiple branding whereby similar products are packaged under different brand c. advertising limits CC to existing dominant rms Monopolistic Competition 1. AE a. not AR. P>MC i. but due to existing close substitutes, its price elastic and hence P only marginally more than MC b. MC also advertise, to differentiate their products. economic waste, as those resources can be put into better use i. but can provide better consumer information , helps to move market close to PC, this is not economic waste

2. PE a. society POV, not PE, likely to produce at falling portion of LRAC i. excess capacity theorem>> their attempts at product differentiation results in higher AC than necessary b. own POV, X efcient, otherwise make losses in LR 3. equity a. LOW BTE, only normal prots in long run, can spread opportunities and wealth across society b. loss of consumer surplus, but is minimal compared to Oly or monopoly 4. dynamic a. rms have incentive to make their products less substitutable i. but ability is limited by LRNP 1. little investment for RnD ii. technology is easy to copy as well b. thus its minor changes in packaging and design mainly. 5. consumer choice a. they can chose who they want to buy from and what they want to buy

PRice discrimination in monopolies and oligopolies - producer sells a product to different buyers at different prices - consumer is charged different prices for same product at different time period - difference in price not caused by difference in production cost 1. conditions for PD a. seller have control over market supply (make pd possible) i. caused by BTe, imperfect info on consumer, high transport costs b. no possibility of resale between different market (make PD possible) i. otherwise arbitrage will restore price equality c. rm must be able to segment the market into separate and identiable groups i. each sub market must have different price elasticities of demand. 1. more inelastic, higher price ii. make PD protable

2. rst degree, perfect PD a. different price for every unit sold. charge consumer the max he is willing to pay. b. all consumer surplus is captured. c. since consumer is charged exactly what he is willing to pay, MR = price and can be equal to MC == AE. 3. second degree, block pricing a. according to how much consumers purchase, monopolist charges differently. b. uniform price for initial specic quantity, then lower price for additional batch 4. third degree a. same product at different price to different customers for reasons not arising from cost differences b. must have 2 or more sub markets with different PED c. total output must be such that each group MR = MC (prot max) i. if not, rm can increase its prot by reducing output d. total output must be divided such that MR for each groups are equal, or else rms wont be maximising prots. 5. cost and benet of PD a. costs i. loss of CS 1. but from society POV, its a transfer of surplus 2. rst degree its actually P=MC , AE 3. inefcient use of resources b. benets i. higher output 1. output under PD rm is higher than single price monopolist or oligopolist 2. allows consumers from lower income groups to consume a good which they could otherwise not afford ii. higher prots may facilitate RnD 1. higher revenue and thus prots a. prots spent well in RnD lead to product improvement and cost reductions iii. provision of goods that would otherwise not be produced due to high costs. 1. PD is important for industry with AC higher than the price consumers are willing and able to pay at all levels of output.

Market failure EXternalities -- wellbeing of a third party is affected by production or consumption of a good, and yet neither receives nor pays any compensation for that effect. 1. negative externalities a. without positive externality, DD curve = MPB = MSB b. at equilibrium output MPC = MPB, MSC>MPB i. over allocation of resources to produce that good relative to social optimum ii. Not AE 2. positive externalities a. MPC = MSC b. at market equilibrium, MPC = MPB, the MSB > MSC c. free market quantity is less than social optimum quantity , under consumption of good, hence deadweight loss market imperfection 1. prot max output at >> MC = MR, MC must be rising. AE must be P= MC a. the value of benet that consumers gets from the last unit of the output produced is higher than the cost of using the resources to produce that unit. output should be increased. 2. market power come from barriers to entry a. the greater the BTE, the less new rms enter, the less substitutes, the less Price elastic for rms demand, the more ability of prot max rm to charge higher price, the greater divergence between price and MC, the greater DWL. COrrect market failure 1. taxation of goods with negative externalities a. specic tax equivalent to the monetary value of the negative externalities generated per unit of output i. compel rms to internalise external costs. 1. specic tax will raise rms cost, shifting supply curve from MPC to MSC. ii. tax results in lower quantity, which is optimal quantity, over allocation is corrected. 1. eliminates DWL iii. tax revenue can be used to pay for damage arising from the production of this good

b. merits i. allows market to continue to operate according to market forces and reach a state of equilibrium ii. tax on external cost, rms have incentive to use production methods that pollute less in order to pay less tax, can lead to lower pollution level at lower overall cost iii. tax provides government revenue to nance social and community development project c. limitation i. accurate valuation of external cost is difcult. over valuation of external cost means lower than socially optimum output vice versa 1. lack of precision, societys welfare cannot be maximised ii. effectiveness of tax is constrained by PED. PED inelastic then tax not effective unless very large. 2. subsidies on goods with positive externalities a. sub to producers, shifts MPC to MPC with subsidy i. increase equilibrium output ii. no more under allocation of resources, DWL eliminated b. sub to consumers, shift MPB to MSB, increased consumption to optimal level MSC = MSB c. merits i. most effective way to correct positive externalities, it is easy to implement to bring about increased production and consumption, it can be adjusted according to magnitude of problems ii. internalising positive externalities that allow market to operate. allows market forces to reach equilibrium d. demerits i. hard to evaluate the external benet. over valuate lead to over consumption vice versa. ii. high government expenditure to nance subsidy. may require accompanied high tax rate which discourage effort and investment. 3. legislation/government regulations a. process of controlling business activities through law and administrative , prohibit or regulate behaviour that imposes external cost i. forces potential offenders, under threat of legal action, to bear all the costs associated with their production. b. merits i. simple to implement compared to market based measures

ii. regulations compel producers and consumers to comply and reduce pollution which taxes may not always do iii. easier to implement than tax which can be passed around between consumer and producers c. demerit i. enforcement of law and regulations are difcult and expensive. constant checking is needed and that can incur high costs for government ii. suffer from lack of technical information > types of pollutants emitted and which to ban because all have different effects iii. penalties must be harsh enough for law to be effective d. hence partially effective 4. tradable permits -- good for sustainable development a. permits to pollute given by governments or international body that can be traded i. price of permit determined by dd and ss ii. failing to comply to permit will incur heavy penalties iii. hence, it rewards seller for reducing emissions and penalises buy for polluting b. supply of permit is perfectly inelastic. supply quota, vertical line. increase dd, increase price. c. merits i. socially optimal level can be targeted by the cap level of permissible pollution, reduction in overall pollution level 1. quota allows government to achieve desired output much more effectively than tax and sub 2. government can progressively reduce the number of credits issued 3. does not require accurate valuation of external costs ii. cost effective than regulation 1. rms have incentive to emit at low cost, and sell it for prot. this reduces pollution at a lower cost to society than regulation 2. encourages innovation in technology to reduce emissions to sell d. demerit i. implementation is hard and high cost incurred from measuring pollution and monitoring the level of emissions by rms ii. government have to not only determine the amount of pollutants but also max for each type of pollutant. require high technical information that is often not available iii. political favouritism --- give permits to preferred rms for political support (or economic)

iv.nes have to be high enough to ensure that rms do not try to cheat the system or even chose to just pay the ne 5. overall, it i unlikely that government can achieve the desired shift in MPC curve to optimal quantity. partially effective. 6. direct provision of merit goods a. use tax revenues to provide merit goods directly. also likely to subsidise it by making it available to its users at low price. b. merit i. market is based on ability to pay, but merit goods shouldnt be based on this ability to pay as everyone should be allowed access to it. Hence direct provision allows those from lowest income household to gain access to merit goods. this ensures social equality ii. positive externalities hence benet the society iii. prevent unenlightened, imperfect knowledge consumers to under consume such goods, like education, some parents may not see the importance of it but only see the price of consuming it 1. they do not realise how much benet they can derive from consumption of the merit good. medical care for instance, they chose to not see doctor because its expensive c. demerit good i. estimation of level of dd is required if government wanna provide it. this can still lead to AE inefcient if its estimated wrongly because of lack of information Government regulation of monopolies - - market dominance 1. when monopolies and oligopoly have ability to set market price to their advantage a. DWL and not AE b. worsen equity >> distribution of income between consumers and producers 2. natural monopoly a. large IEOS that monopoly enjoy and no other rm can produce as efciently. high MES and hence only one rm can operate at MES. b. MC = MR prot max 3. Price regulation a. MC pricing i. AE as P=MC, consumers MB is equal to MC ii. but natural monopoly makes subnormal prots as AC is higher than P. 1. need subsidy or 2nd degree price discrimination a. otherwise rm will leave he industry

b. AC pricing, p= AC i. monopoly make normal prot ii. but less than socially optimal output c. Both AC and MC reduce price and increase output , increase CS and society welfare d. but dd and cost can only be estimated by rm, hence rms can overstate cost in order to charge higher price e. price pushed low for short term interest of consumers, monopoly may have little incentive to invest in RnD , hence long term disadvantage of consumers 4. law to outlaw formation of monopolies a. monopolies can form through horizontal mergers. Anti trust law disallows it 5. law to forbid certain types of monopoly behaviour a. predatory pricing, set low price to deter competition 6. regulation that seek to maintain certain level of competition a. encourage competition by lowering BTE 7. nationalisation a. merit i. solves problem of monopoly price at MC = MR ii. protects consumers from high prices iii. ensuring that social costs and benets are taken into account when production decisions are made b. demerit i. government failure lead to inefciencies 1. lack of prot motive reduces the drive to be efcient which private enterprises have ii. bureaucratic nature of government management and lack of entrepreneurs lead to inefcient in production. iii. too large and hence diseconomies of scale

Application to singapore Output control -- COE, quota 1. number of COE determined by targeted vehicle growth rate - so as to reduce trafc congestion and air pollution 2. quota limits max output at socially optimal level of MSC = MSB a. price of COE increases ownership costs.

3. merits a. COE premiums collected can be used to nance land transport and public transport development that benet the society at large b. limiting car ownership reduce number of cards, reduce air pollution and more efciency as roads are less congested. saves time>> higher labour productivity

4. demerits a. congestion due to car usage, not the possession of cars. b. high ownership cost can result in increasing car usage, so that they can maximise the money they spent on COE which lasts only 10 years. ERP 1. its like a tax, forcing those who chose to consume to internalize the external cost 2. MPC = MSC, reach socially optimum output at MSC = MSB 3. merit a. direct target at car usage i. reduce congestion ii. charges is exible as it can vary by time and location based on trafc ow 1. will not under utilise the roads b. fair as it charges only those who use 4. demerit a. public acceptance , unpopular policy education 1. private benet a. increases productivity and earnings. 10% increase in wages for every year of schooling b. upward social mobility, to improve the welfare of lower income group 2. external benet a. economic competitiveness i. attracts MNVS b. promotes positive social norms and values that reduce social and political instability like crime rate >> as education increase income reduces unemployment 3. policies a. heavy subsidy of primary education, secondary less and higher education less but still subsidised.

i. higher education, individuals already recognise the benets of higher education and are willing to pay for it 1. but hard to calculate external benet of different levels of education,

b. regulation or direct provision i. compulsory education act, all kids be educated until primary 6 ii. not left to free market, government decides the number of teachers via hiring policies and number of places for children via school enrolment 1. demerit a. right number of schools and teachers. MOR cannot gauge demand for education correctly, then there may be shortages and surpluses. c. hence its a mix of government intervention and free market healthcare 1. primary care and hospital care a. latter has more imperfect information cuz its more complex b. hence primary left largely to free market, 80% unsubsidised i. hospital is 80% subsidised 2. regulation a. to reduce supplier induced demand, government regulate number of public hospitals. determine which medical services are subsidised i. those that are cost effective, of proven value, not those that are medically non essential like cosmetic or unproven like experimental drugs b. MOH control high tech equipments to reduce unnecessary duplication 3. means testing a. focus limit resources for needy singaporeans by channeling it to those who needs it the most i. high income patients might be attracted to B or C wards. But they receive lower subsidies if they chose to stay there. 4. 3 M framework a. medisave i. compulsory saving scheme. for nancing non primary healthcare. individuals savings, not third party money

1. but still got some degree of government intervention to prevent a person from prematurely depleting his medisave a. like limits on the amount that can be withdrawn per treatment b. medishield i. medical insurance. it can be paid through medisave, it is opt out system thus everyone is automatically covered 1. makes it less costly in terms of administration, increases risk pooling a. making premiums lower and more affordable b. co-insurance reduces overconsumption, unlike full third party payments. c. medifund i. provision for those very poor. funded by budget surpluses of government government failure 1. imperfect info a. long term benets will induce government to implement policies that are not efcient now 2. bureaucracy and inefciency of GI a. admin costs 3. time lag a. time to recognise a problem, time to implement policy, time for policy to take effect 4. shift in government policy a. if shifts are too frequent, difcult for rms to plan ahead and allocate resources efciently if they cannot predict tax and subsidies .