govt intervention to address mkt dominance

Question 1

state policies to reduce/prevent mkt dominance

Answer 1

address root cause

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

Question 2

1. legislation - pro-comp acts

Answer 2

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

Question 3

2. lower barriers to entry

Answer 3

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

Question 4

policies to address negative impacts of mkt dominance

Answer 4

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

Question 5

1. marginal cost pricing

Answer 5

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.

Question 6

2. average cost pricing

Answer 6

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

Question 7

3. lump sum tax

Answer 7

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

Question 8

4. nationalisation

Answer 8

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)

Question 9

5. joint provision

Answer 9

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

Question 10

policies to address negative impacts of mkt dominance

Answer 10

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