Economics Topic 5 - Market Failure Flashcards
(35 cards)
Market Failure
Failure of market to allocate resources efficiently
(allocative inefficiency)
Marginal Benefit
Benefits received by consumers for consuming one more unit of a good
Marginal Cost
Cost to producers of producing one more unit of the good
What are some types of markets
- Perfect competition
- Monopoly
- Monopolistic competition
- Oligopoly
What are characteristics of a perfect competition market
- Large number of buyers and sellers
- Firms are price takers (no market power)
- Homogenous products –> multiple number of firms selling the same thing
- No barriers to entry or exit
E.g. Agricultural market
What are characteristics of a monopoly
- 1 firm
- No close substitutes for product
- Firms are price setters
- High barriers to entry
E.g. Utilities (water, energy)
What are characteristics of an oligopoly
- Few large firms
- Goods are close substitutes
- Barriers to entry exist
- Sellers are independent - engage in strategic behaviour
- E.g. Supermarkets (coles, woolworths, iga, aldi), telecommunications (telstra, optus, vodafone)
What are characteristics of a monopolistic competition market
- Many firms
- Differentiated products but close substitutes
- Low barriers to entry
- Info is imperfect
- Firms are price setters
- E.g. Phone industry, computers
What are some barriers of entry into a market
- Economics of Scale
- Branding
- Legal barriers
- Control of essential resources
- Aggressive tactics
What is anti-competitive behaviour
Arrangements or agreements between firms that seek to restrain competition and remove the automatic regulation that competitive markets achieve (illegal)
Economics of scale as a barrier of entry
○ Economics of scale: Permitting lower average costs to be achieved as the firm increases its size
§ Avery total costs of large firm are substantially lower than costs faced by smaller firm
§ Large firm can charge a lower price than a smaller firm and force the smaller firm into a situation where it will not be able to cover its costs
Branding as a barrier of entry
○ Branding: Created by firm of unique image and name of a product
§ Advertising campaigns that try influence consumer tastes in favour of the product, attempting to establish consumer loyalty
§ Does not lead to monopolies, methods used by oligopoly and monopolistic competition
E.g. apple
Legal barriers of entry
§ Patents: Rights given by the government to a firm that has developed a new product or invention to be its sole producer for a specific period of time
□ They will have a monopoly during this time e.g. Patents on new pharmaceutical products
§ Licenses: Granted by governments for particular professions or particular industries
§ Copyrights: Guarantee that an author has the sole rights to print, publish, and sell copyrighted work
§ Public franchises: Granted by gov to a firm which is to produce or supply a particular good or service
Tariffs, quotas, and other trade restrictions: Limit the quantities of a good that can be imported into a country, thus reducing competition
Control of Essential Resources as a barrier of entry
§ Monopolies can arise from ownership or control of an essential resource
□ E.g. De beers mines roughly 50% of the world’s diamonds and purchases about 80% sold on open markets
Aggressive tactics as a barrier of entry
When existing firms use tactics to discourage new firms from entering the market
What are some business practices that reduce competition
- Cartel
- Collusion
- Market Sharing
- Collusive Tendering
- Predatory Pricing
- Resale price maintenance
- Exclusive dealing
- Collective boycott
- Merger
Causes of market power
- A firm has market power if it is able to affect the market price by varying output
- Firms in an imperfect market have market power as they are able to do so
○ E.g. Monopoly, oligopoly
○ Oligopolistic firms sometimes act together (or collude), usually illegally, to acquire greater monopoly power - Caused by their characteristics and barriers to entry
- Firms in an imperfect market have market power as they are able to do so
What are some policy options that effect market power
- Regulation
- Deregulation
- Legislation
How does regulation influence market power
- If there is a natural monopoly, it is not in society’s interest to break it up into smaller firms, as this would result in higher average costs and it would be inefficient
- Gov. Usually regulate natural monopolies, to ensure more socially desirable price and quantity outcomes
- Gov also control who enters market
How does deregulation influence market power
- Gov regulations that restrict comp include:
○ Limiting number or types of businesses
○ Limiting ability of businesses to compete
○ Reduce the incentives for businesses to compete
○ Limiting the choice and information available to consumers
Some gov. Regulations need to be de-regulated to enhance competition
How does legislation influence market power
- Put in place to limit anti-competitive behaviours to achieve a greater degree of allocative efficiency
- ACCC: aims to protect, strengthen and supplement the way competition works in Australian markets and industries
Enforce competition and consumer act 2010 and other legislation that promotes competition and fair trading’
- ACCC: aims to protect, strengthen and supplement the way competition works in Australian markets and industries
What is market power
Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition, which leads to reduced output, higher prices and loss of economic welfare
(Ability of a firm to vary output to raise prices)
(insulate itself from comp)
What are rival goods and excludable goods
Rival: Does the consumption by one party reduces the supply availability for another
Excludable: Is it possible to exclude non-payers from the good/service
What are some types of goods
Private: Rival, Excludable (e.g. Clothing)
Club Goods: Non-Rival, Excludable (e.g. gyms, concert)
Common Property Resources: Rival, Non-excludable (e.g. fish in the ocean)
Public Goods: Non-rival, Non-excludable (e.g. national parks)
