Monopoly Case Study

When the stock market crashed in October 1929, the nation plummeted into a major depression. An economic catastrophe of major proportions had been building for years. The worldwide demand for

For my research paper I decided to write about monopolies. I chose to write about monopolies because I wanted to learn more about them. No this type of monopoly is not a board game in which consumers engage in buying houses or property with fake money. Instead this type of monopoly is a firm that is the only seller of a good or service that does not have a close substitute. An example of a monopoly is natural gas company or Time Warner Cable or Microsoft and its Windows operating system. Although few people like monopolies and even though few companies are monopolies, the model of a monopoly can be useful. You see a monopoly is useful in analyzing situations in which firms agree to act together as if they were a monopoly. Monopolies are not illegal in the United States. What is illegal is actions taken by monopolies to limit competition. But there are times when one supplier in a market is better than a competitive market? Should the government work to protect that one supplier in a market?

1. On Market Failure – We said that the rationale for public policy is either market failure and/or government failure. Address the following with this rationale in mind:

Choose one of the three types of market failure and give a real world example of it. Do you believe the government has the ability to solve this problem?

If we consider this supply and demand diagram prior to Government intervention (red line), the market leads to equilibrium price and quantity (P1, Q1) determined at the intersection of the supply (or MPC) and demand curve. Due to the

3. Pollution is considered by most a negative externality. Some economists would like to see the costs of these burdens incorporated into the price of goods that we buy. For instance, since coal fire power plants increase emissions that could potentially lead to climate change, these economists believe that the price we pay for electricity is not adequately high enough. Draw a completely labeled graph and illustrate on the graph how much higher electricity prices would be if the full costs of electricity production were taken into account. You do not need to provide actual numbers; rather, show on the

Specifically, in the presence of negative externalities, a Pigovian Tax can be utilized to correct the externalities and produce an efficient outcome. In regards to hydraulic fracking, a Pigovian Tax can be applied to the quantity of gas pumped daily during the process of shale fracking. A Pigovian Tax would incentivize producers to reduce the quantity of gas pumped daily as well as generate revenue that can be used to offset the negative effects of hydraulic fracking in communities. Exemplified by Graph 4, the Marginal Private Cost endured by the firms would be shifted upwards by the amount of the tax to the point of Marginal Private Cost + Tax. Due to this increased cost, producers would have the incentive to diminish daily output of gas to the socially optimum level of QS, which considers the Marginal Social Cost as well. The level of the tax would equal the external damage at the quantity produced, which is represented by the difference between Marginal Social Cost and Marginal Private Cost at the point they both cross the Marginal Private Benefit. Therefore, the total tax revenue is represented by the light purple area. By utilizing a tax, it offers an economic incentive to hydraulic fracking firms to reduce production levels as well as compensate communities with the tax revenue. However, the Pigovian Tax would only apply to gas pumped from the process of shale fracking in order to address the specific negative externalities that arise during hydraulic fracking. Additionally, the tax revenue collected can be distributed back to the communities

In the late 1800s the farmers believed that the railroad companies were constricting their profits away, and the government was in favor which is what gave them the reason for discontent. The farmers had plenty of reasons to be angry/upset about that situation because the government saw a need for reform which alludes the fact that their were problems: Monopoly on railroads caused a raise in cost, deflated value of crops, and farmers weren’t treated in a friendly way by big business.

Carbon taxing coal-based products, in a revenue-neutral way, will help discourage overuse of fossil fuels. The United States needs to reduce carbon emissions in order to avoid the costs that pollution and climate change inflict on the general economy and individuals. Carbon, unlike other commodities exchanged and consumed in the free market, bears unique costs to the general economy that its market price does not encompass. The pollution we create when we consume carbon contaminates our air, raises temperatures, and makes severe weather events more frequent. A carbon tax is an economic mechanism that forces actors in a free market to come face-to-face with the social cost of

As seen from both Figure 2 and Figure 3, the application of negative externality of consumption is appropriate, as it clearly indicates the before and after results of the implementation of the tax. As clearly shown, overconsumption leads to social inefficiency, but by applying a tax, a decrease in the consumption of plastic bags can allow for a shift of the market. The increase in social efficiency also allows for social cost and benefit to be equal. By applying taxes on the plastic bag negative externality it allows for a reduction in the supply of plastic bags. Due to this tax, the supply curve S1 will shift upwards to S2. This will inherently also reduce the gap between Qefficient and

In Australia, there is an emerging consensus that the government should take further actions to help mitigate and combat climate change. The current most accepted policy by government is the introduction of a carbon tax followed by an ETS in 2015. However we are focusing on the carbon tax in this essay and not the ETS. Here is a brief explanation of the dynamics of a carbon tax. A carbon tax is a tax on energy sources, which emit carbon dioxide (Co2). Therefore, carbon taxes address the problem of negative externality. Externalities are the subsequent effects when individual production or consumption of a particular good or service imposes costs or benefits on others. Therefore negative externalities are effects, which pose harm to others without their direct interaction (Basic Economics 2011). However, usual market practices and transactions do not reflect these cost and benefits in the prices involved in the transaction, or take into account in their transaction decision. Therefore this is a form of market failure. By imposing a cost on these negative externalities, the hidden cost can be addressed. Ultimately the purpose of a carbon tax is to reduce emissions of carbon dioxide and therefore reduce

Over the past couple of years, global fuel subsidies have had tremendous influence on energy market systems. The incentives created by global fuel subsidies create excess consumption as well as ineffective markets. In his article titled: “The Environmental Cost of Global Fuel Subsidies”, Lucas W. Davis explains that it is necessary for countries to reform fuel subsidies in order to accurately reflect private costs and external costs in energy prices (Davis, 2017). In other words, Lucas W. Davis attempts to quantify the external costs from global fuel subsidies in order to reflect the true cost on environmental externalities. This is an important issue because the presence of fuel subsidies not only damages energy market systems but it

“Price discrimination exists when two similar products which have the same marginal cost to produce are sold by a firm at different prices. This sort of practice is highly controversial in terms of its impact on both consumers and rivals” (Price Discrimination, 2006, p.1). There are many ways to accomplish these sort of conditions because the transactions surely need not be simultaneous; indeed, there is temporal discrimination, such as between Sunday rates and week, day rates, matinee and evening prices, peak rates and off-peak rates, season and off-season prices. To sell different qualities or products with different marginal cost at the same price, or to buy different qualities or factors of different efficiency at the same price, is also discriminatory.

As the negative externalities appear, tax can apply. As the graph shown, people maximize their welfare where PMB = PMC. By applying the tax of P0 -P2, the supply curve shifts to SMC and price rises from P1 to P2, People will now consume less, as the quantity decreases from Q* to Q**, the negative surplus (shaded area) will decrease, thus, the social well-being increases.

In order to understand the diagram above, a few concepts need to be explained. Marginal Cost and Marginal Benefit are economic theories that explain the benefit or cost that a society encounters with each additional production or consumption of a unit of any given good. In this diagram, Marginal Social Cost and Marginal Public Cost are assumed to be equal. However, the Marginal Social Benefit is less than that of the Marginal Public Benefit. This is an example of market failure, when a market overproduces and/or consumes beyond society’s need or point of equilibrium (Qso). The Distance between Qso and Qe demonstrates China’s welfare loss (represented by the grey triangle) and the negative externalities that society incurs with each additional sale of Diesel and