govt intervention to address mkt dominance Flashcards Preview

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Flashcards in govt intervention to address mkt dominance Deck (10)
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1
Q

state policies to reduce/prevent mkt dominance

A

address root cause

  1. legislation - pro-comp acts
  2. lower barriers to entry
2
Q
  1. legislation - pro-comp acts
A

prevent formation of monopolies and to curb collusive behaviour

e. g. competition act in SG
- any mergers/acquisitions have to be approved by regulatory authority

+ address root cause which is lack of comp.

  • diff to prove collusion
  • large firms devote huge resources to circumvent laws
3
Q
  1. lower barriers to entry
A

makes it easier for potential entrants to enter mkt and compete with incumbent

  • demand for good of incumbent firm becomes more price elastic as the number of substitutes in the mkt increases, reducing its mkt power to raise prices and restrict output
  • reduce price towards MC, leading to lower DWL, reducing allocative inefficiency
    graph: fall in DD (leftward shift of DD and MR curve)
  • increase comp forces incumbent to be more productive efficient/ achieve dynamic efficiency

+ address root cause
x reduced DD, reduces ability to enjoy IEOS, higher COP, less productive efficient
x lower profits, worsen dynamic inefficiency

4
Q

policies to address negative impacts of mkt dominance

A

have to accept existence of mkt dominance (natural monopoly)

  1. marginal cost pricing
  2. average cost pricing
  3. lump sum tax
  4. nationalisation
  5. joint provision
5
Q
  1. marginal cost pricing
A

in free mkt, monopolist product Qm, charge price Pm and make supernormal profits.
under MC pricing, price is set equal to MC, Pmc
- achieves allocative efficiency, maximises societal welfare

+ price controls can be flexibly adjusted according to change revenue and cost conditions
x in case of natural monopoly, imposition of MC pricing may result in subnormal profits since total revenue < total cost-> shut down -> worsen AE if no good is produced
- to ensure monopoly sustains production, govt have to provide subsidy equal to loss PmcPacXY so that regulated monopolist can earn at least normal profits. may lead to budget deficit.

6
Q
  1. average cost pricing
A

govt enforces that monopoly set price equal to AC, Pac
- reduce monopoly profit to zero while bringing output produced closer to socially efficient level, produce at Qac
+ as compared to mc pricing, ac pricing allows natural monopoly to remain in operation and good still made available
x allocative inefficiency still exists although issue is mitigated, not producing at Qs
x earn normal profits -> no incentive to improve efficiency/ engage in R&D, lower PE, DE

7
Q
  1. lump sum tax
A

average cost shift upwards from AC1 to AC2.
- not possible to pass on higher costs to consumers since MR, MC not affected (only affected by variable cost changes and not fixed cost changes)
- subsequently, tax revenue can then be redistributed to low income families, improving equity
+ tax can be flexibly adjusted according to changing revenue and cost conditions
+ govt can choose lump sum tax amt that is balanced btn maintaining ability of firm to innovate and what is considered excessive and inequitable profits
x can reduce income inequity, but firms may be less incentivised to innovate

8
Q
  1. nationalisation
A

govt take over ownership of certain key industries (water, electricity). prevent provision of essential services to be subjected to firms’ profit-maximizing behaviour

  • objective changes to welfare maximizing, bases price and output decisions on maximising efficiency and equity.
  • hence, produces at Qs where P=MC, removes allocative inefficiency associated with mkt dominance

+ govt can immediately ensure quality of service
x govt lack technical expertise to operate firm, leads to increase cop, worsen PE and quality
x subnormal profits might be incurred when producing at P=MC. govt have to cover subnormal profits using tax revenue, or by diverting subsidies from other industries (worsen AE)

9
Q
  1. joint provision
A

To exert partial control of market

  • Long-term partnership of public and private sector. Govt engage private sector providers in delivering non-core govt services if it is more efficient to do so
  • Govt can engage private companies to construct facilities/supply equipment, as well as provide services/manpower.
  • Tap on private sector expertise resources and innovation to meet public needs in the most cost-effective manner

achieve AE: increasing qty from Qm to Qs
Achieve PE: private providers adopt least cost methods to provide public service so as to win the govt contract
Price lowered to socially optimal price PS, more affordable for low-income groups, ensuring equity.
+flexible, govt and private sectors share risks
X imperfect info for govt to monitor service quality of private sector
X take time to establish and negotiate terms of contracts

10
Q

policies to address negative impacts of mkt dominance

A
  1. MC pricing
  2. AC pricing
  3. lump sum tax
  4. nationalisation
  5. joint provision