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Topic:
Government Intervention, Market Failure, Monopoly Power
Essay Instructions:
There should be clear evidence of extensive reading on this topic, and critical evaluation of economic theory and empirical evidence.
You could apply the economic concepts and theory, e.g. industry organization (IO), elasticity of demand, etc., to discuss government interventions and the potential benefits from market power.
You are required to provide empirical examples to support your argument.
You are expected to consult a range of reliable resources, e.g. textbooks, academic papers (peer-reviewed).
You should make full use of electronic database available in library to gather relevant information (both theoretical and empirical).
Please do NOT use unreliable internet sources of information, such as Wikipedia.
You are required to use the USIC Referencing Guide to cite and reference the material you have used.
Page 2 of 6
Marking is anonymous. For this reason, ONLY valid student registration number (Student ID Number) should be written on the Cover Sheet and in the header of the essay.
The word-count for the essay is 2,000 words, excluding references or bibliography. The exact word should be noted on the Cover Sheet of your essay.
The essay should be word-processed using Time New Roman or Calibri or Arial with front size of 12 and 1.5 line spacing.
Essay Sample Content Preview:
Monopoly Power and Government Intervention
1. Introduction
One of the reasons for the formation of monopolies is the case where a certain organization has exclusive ownership of a rare resource. Monopolies are also formed in cases where the government accords an organization monopoly status. Monopolies are also formed when producers have patents over designs or have copyright over designs or in the event where two competing companies form a merger. This paper examines how monopoly power can be controlled through governmental intervention. The paper objective will be attained through a critical discussion of the various theories on monopoly power.
The paper is divided in to three sections. Section one gives a brief synopsis of the issue and the objectives of the paper. The second part of the paper discusses the various monopoly theories in existence and the application of each theory in regulating the market. Section 2 will also give the advantages and disadvantages of each theory and examine the different governmental interventions in existence. The last section gives a brief conclusion of the theories discussed in the paper.
2:0 Governmental Interventions
2.1 Theories about Monopoly Power
The social and financial risks of monopolies are clear. To deal with the impacts of the large institutions, the government has taken steps, using both laws and court rulings, to regulate monopolies. Though the approaches have been diverse, the objective of curbing market domination has been invariable. One of the questions that have emerged in regards to government regulation is why the need for regulation in a free economy. There are various theories that explain why the government finds the need to regulate firms and each of them is geared towards protecting the consumer from unfair competition. The theories that will be discussed in this section are;
Market failure
Dead weight loss (DWL)
Consumer surplus
Product surplus and,
Societal welfare
2.1.1 Market Failure
Market failure refers to a situation where free markets lack the ability to develop or when they are unable to allocate the available resources effectively. In such cases, the government steps in to safeguard the consumer from the negative effect of the market failure (Dreze, Hoch, & Purk, 2004). Market failure can be either partial or complete. Complete market failure is brought about by the inability of the free market to distribute scarce resources to completely satisfy a need or a want. This is brought about by the absence of incentives that can encourage firms that are in need of profits to enter a particular market (Feldstein, 2008). This is mostly in the area of providing public goods such as street lighting where despite the need, private individuals would not be willing to pay. The absence of someone to pay means that there would be no revenue collection and as such, private companies would be reluctant to provide the service (Hugues & Frederic, 2012).
2.1.2 Deadweight Loss
The result of a competitive market has a very significant property. When at equilibrium, all profits from business are realized. This implies that there is no extra surplus to get from extra dealings between buyers and sellers. When this happens, the allocation of goods and services in the economy is efficient. There is however, instances where the markets fail to function properly and not all the benefits from trade are realized. When there is a buyer surplus or a seller surplus, economists point out that there is a deadweight loss (Hausman, 2008).
The monopolist produces goods and services that ensure that the marginal revenue and marginal cost are equal (Gordon, 2007). The demand curve at this quantity is then used to determine the price. In monopolies, the total revenue less the total cost determines profits. In the event that the overall output is lower than socially optimal, what follows is a deadweight loss (Greene, 2000). Deadweight loss can also arise in scenarios where there are quantity or price regulations (Hausman, 2008).
2.1.3 Consumer Surplus
Consumer surplus is the variation between the amount that customers are willing to pay what they are capable of paying to get goods or service and what they actually end up paying (Bils & Klenow, 2001). Wherever the claim for goods or services is clearly elastic, the consumer surplus is at zero since the price that people actually pay is relative to what they are ready to pay (Brynjolfsson, Smith, & Hu, 2013). In disparity, wherever the demand for any goods or service is perfectly inelastic, the consumer surplus remains infinite. In such circumstances, demand does not translate to alteration in prices (Weitzman, 2008). Regardless the pricing, the demand remains constant. Wherever demand is inelastic, there is a higher possibility for consumer elasticity since consumers are ready to pay a higher price to ensure that they continue getting the product (Lewis, 2010). Many firms in monopolies raise their price wherever there is inelasticity in demand so they can convert the consumer surplus into producer surplus.
2.1.4 Producer Surplus
Producer surplus on its side refers to the variation between the level that a firm is ready to supply for a certain price and the amount that they actually supply at the end. While the consumer surplus and product surplus are supposed to be at equilibrium, this is often not the case in monopolies. When a firm has monopoly in a certain area, they can decide to under-produce a certain goods or services then raise the prices (Ra, 2015). Wherever a company produces lesser goods and services than the demand, the prices go up as the producer knows that there are no enough goods and services in circulation to meet the demand and hence a producer surplus. In order to prevent a producer surplus from occurring, it is important for the government to ensure that there is competition in the market (Hausman, 2008).
2.1.5 Societal Welfare
Societal welfare is explained as the sum of consumer surplus and producer surplus. In competitive economies, the consumer surplus and product surplus is supposed to be at equilibrium ensuring that consumers do not pay more for certain goods and services (Auten & Robert, 2009). The government is therefore supposed to monitor the market to ensure that it places controls in areas where consumer surplus or product surplus is existent. These regulations are important as they ensure that the welfare of the consumer is given first priority (Simpson, 2006).
2.2 G...
1. Introduction
One of the reasons for the formation of monopolies is the case where a certain organization has exclusive ownership of a rare resource. Monopolies are also formed in cases where the government accords an organization monopoly status. Monopolies are also formed when producers have patents over designs or have copyright over designs or in the event where two competing companies form a merger. This paper examines how monopoly power can be controlled through governmental intervention. The paper objective will be attained through a critical discussion of the various theories on monopoly power.
The paper is divided in to three sections. Section one gives a brief synopsis of the issue and the objectives of the paper. The second part of the paper discusses the various monopoly theories in existence and the application of each theory in regulating the market. Section 2 will also give the advantages and disadvantages of each theory and examine the different governmental interventions in existence. The last section gives a brief conclusion of the theories discussed in the paper.
2:0 Governmental Interventions
2.1 Theories about Monopoly Power
The social and financial risks of monopolies are clear. To deal with the impacts of the large institutions, the government has taken steps, using both laws and court rulings, to regulate monopolies. Though the approaches have been diverse, the objective of curbing market domination has been invariable. One of the questions that have emerged in regards to government regulation is why the need for regulation in a free economy. There are various theories that explain why the government finds the need to regulate firms and each of them is geared towards protecting the consumer from unfair competition. The theories that will be discussed in this section are;
Market failure
Dead weight loss (DWL)
Consumer surplus
Product surplus and,
Societal welfare
2.1.1 Market Failure
Market failure refers to a situation where free markets lack the ability to develop or when they are unable to allocate the available resources effectively. In such cases, the government steps in to safeguard the consumer from the negative effect of the market failure (Dreze, Hoch, & Purk, 2004). Market failure can be either partial or complete. Complete market failure is brought about by the inability of the free market to distribute scarce resources to completely satisfy a need or a want. This is brought about by the absence of incentives that can encourage firms that are in need of profits to enter a particular market (Feldstein, 2008). This is mostly in the area of providing public goods such as street lighting where despite the need, private individuals would not be willing to pay. The absence of someone to pay means that there would be no revenue collection and as such, private companies would be reluctant to provide the service (Hugues & Frederic, 2012).
2.1.2 Deadweight Loss
The result of a competitive market has a very significant property. When at equilibrium, all profits from business are realized. This implies that there is no extra surplus to get from extra dealings between buyers and sellers. When this happens, the allocation of goods and services in the economy is efficient. There is however, instances where the markets fail to function properly and not all the benefits from trade are realized. When there is a buyer surplus or a seller surplus, economists point out that there is a deadweight loss (Hausman, 2008).
The monopolist produces goods and services that ensure that the marginal revenue and marginal cost are equal (Gordon, 2007). The demand curve at this quantity is then used to determine the price. In monopolies, the total revenue less the total cost determines profits. In the event that the overall output is lower than socially optimal, what follows is a deadweight loss (Greene, 2000). Deadweight loss can also arise in scenarios where there are quantity or price regulations (Hausman, 2008).
2.1.3 Consumer Surplus
Consumer surplus is the variation between the amount that customers are willing to pay what they are capable of paying to get goods or service and what they actually end up paying (Bils & Klenow, 2001). Wherever the claim for goods or services is clearly elastic, the consumer surplus is at zero since the price that people actually pay is relative to what they are ready to pay (Brynjolfsson, Smith, & Hu, 2013). In disparity, wherever the demand for any goods or service is perfectly inelastic, the consumer surplus remains infinite. In such circumstances, demand does not translate to alteration in prices (Weitzman, 2008). Regardless the pricing, the demand remains constant. Wherever demand is inelastic, there is a higher possibility for consumer elasticity since consumers are ready to pay a higher price to ensure that they continue getting the product (Lewis, 2010). Many firms in monopolies raise their price wherever there is inelasticity in demand so they can convert the consumer surplus into producer surplus.
2.1.4 Producer Surplus
Producer surplus on its side refers to the variation between the level that a firm is ready to supply for a certain price and the amount that they actually supply at the end. While the consumer surplus and product surplus are supposed to be at equilibrium, this is often not the case in monopolies. When a firm has monopoly in a certain area, they can decide to under-produce a certain goods or services then raise the prices (Ra, 2015). Wherever a company produces lesser goods and services than the demand, the prices go up as the producer knows that there are no enough goods and services in circulation to meet the demand and hence a producer surplus. In order to prevent a producer surplus from occurring, it is important for the government to ensure that there is competition in the market (Hausman, 2008).
2.1.5 Societal Welfare
Societal welfare is explained as the sum of consumer surplus and producer surplus. In competitive economies, the consumer surplus and product surplus is supposed to be at equilibrium ensuring that consumers do not pay more for certain goods and services (Auten & Robert, 2009). The government is therefore supposed to monitor the market to ensure that it places controls in areas where consumer surplus or product surplus is existent. These regulations are important as they ensure that the welfare of the consumer is given first priority (Simpson, 2006).
2.2 G...
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