4.2 Market power and market failure

Question 1

why is it rational for 1 firm to provide goods in a natural monopoly (3)

Answer 1

goods provided by natural monopolies are essentials:
-undesirable for competition
-any later firm joining market won’t have the econs of scale that natural monopolies have
-will be driven out of market, huge sunk costs

Question 2

why are natural monopolies regulated/subsidized

Answer 2

goods provided by natural monopolies are essentials:
regulated - to prevent overcharging consumers
subsidised - so firm does not shut down, without subsidy they are operating at a loss

Question 3

Natural monopoly

Answer 3

huge fixed costs
huge potential for economies of scale
rational for 1 firm to provide goods e.g. water

Question 4

what is a monopsony in the context of employment and wages

Answer 4

the sole employer of labor in a given profession

Question 5

characteristics of a monopsony

Answer 5

wage maker
will max revenue ffrom employees by hiring until MRP = MCL

Question 6

do monopsonys pay higher wages/hire more employees than the competitve market or less

Answer 6

lower employment and lower wages

Question 7

what is a trade union

Answer 7

organisation of workers bargaining for better pay/ working conditions

Question 8

what will a trade union lead to in a competitive market

Answer 8

higher wages
but
lower employment - as demand for labour will decrease - creates excess supply of labour

Question 9

what is union markup

Answer 9

the difference in wage after a trade union compared to the wage in a similar profession

Question 9

what does the power of a trade union rely on

Answer 9

union density - the proportion of workers that are part of the firm joining the union

Question 10

impact of a trade union in a monopsony

Answer 10

wages and employment increase

a strong TU makes a monopsony a wage taker

Question 11

Price regulation def

Answer 11

a government policy that sets a legal minimum or maximum prices for specific goods or services

Question 12

RPI price regulation

Answer 12

firms can not increase prices by more than RPI

Question 13

RPI - X price regulation

Answer 13

prices are allowed to increase in line with RPI minus a percentage

Question 14

Benefits of RPI - X

Answer 14

encourages efficiency/ control costs

Question 15

How does imperfect info affect RPI - X

Answer 15

regulators won’t have perfect info
may set X too high - firm swill struggle/shut down, increased unemployment
may set X too low

Question 16

Why is the cost of price regulation a problem

Answer 16

very expensive to investigate a firm/enforce regulation - tax payer gets burden

Question 17

Quality control def

Answer 17

Process used to ensure products meet quality standards

Question 18

Problem with performance targets/Quality control

Answer 18

unintended cons e.g.:
-may take shortcuts to reach performance targets –> reduced quality
- firms may struggle to afford to reach strict quality standards

Question 19

Profit control def

Answer 19

A regulation that limits the amount of profit a firm can make

Question 20

features of profit control

Answer 20

allows firms to make enough profit to cover costs

Question 21

problems with profit control (2)

Answer 21

incentive to increase costs –> allows for profit cap to be higher
Asymmetric info - monopoly may claim that their profits are a lot higher than they actually are

Question 22

Taxes on profit benefits

Answer 22

increases gov revenue

Question 23

What effect will tax on profits have on prices

Answer 23

Will lead to even higher prices - firms will pass tax on to consumer

Question 24

How might firms avoid/reduce impact of tax on profits (2)

Answer 24

firms may commit tax evasion firms may under report profit

Question 25

Impact of tax on profits on innovation

Answer 25

less innovation - less reinvestment of profits

Question 26

Merger policy

Answer 26

Policy that aims to ensure that mergers don't harm competition by investigating mergers - will investigate if merger will create monopoly power - will be broken up if against public interest

Question 27

Privatization def

Answer 27

when state run organisations are sold to the private sector

Question 28

Aim of privatization

Answer 28

To increase competitiveness in a market

Question 29

Advantages of privatization

Answer 29

increases allocative efficiency - prices will decrease/output increases - both are closer to competitive output/price -higher quality products due to competitiveness

Question 30

Disadvantages of privatization (3)

Answer 30

If there's limited competition - low productive/allocative efficiency due to no incentive loss making services will be cut - even if socially desirable Loss of a natural monopoly/ EoS benefits - more competition will lead to productive inefficiency due to being unable to minimize costs

Question 31

what does effectiveness of privatization depend on

Answer 31

level of competition post privatization -low comp may create oligopolies -high comp will create high efficiency gov regulation -may force firms to produce socially desirable goods/services -may force firms to account for externalities e.g. through taxes