Market Failure #3 Monopolies

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Presentation transcript:

Market Failure #3 Monopolies

Monopoly Review Draw a monopoly graph making a profit. Label price, output, and profit. Label the Fair-Return price and the Socially-Optimal price and each output. Identify three specific reasons why monopolies are bad. Why taxing a monopoly is a bad idea. Are monopoly ever good? What are the differences between pure monopoly and price discriminating monopoly?

Government in Action: Antitrust Laws Legislative Executive Judicial

Allocative Efficiency Monopoly Price Socially-Optimal & Allocative Efficiency $9 8 7 6 5 4 3 2 1 MC Unregulated ATC Profit ($6) Fair Return Productive Efficiency D Quantity 1 2 3 4 5 6 7 8 9 10 11 12 MR 4

P MC ATC D Q MR Quantity & Price? Profit or Loss? Price Discrim. Monopoly? Socially-Optimal quantity? Fair-Return Quantity? Elastic Demand Quantity? P 17 15 13 11 9 7 5 3 1 MC ATC D Q 0 2 4 6 8 10 12 14 16 18 20 22 MR 5

P MC ATC D Q MR Quantity & Price? Profit or Loss? Excess capacity? Socially-Optimal quantity? Fair-Return Quantity? Elastic Demand Quantity? P 20 18 16 14 12 10 8 6 4 2 MC ATC D Q 1 2 3 4 5 6 7 8 9 10 MR 6

WHAT ARE ANTITRUST LAWS? Laws designed to prevent monopolies and promote competition. After the Civil War, advances in technology and transportation lead to national markets. Eventually only a few firms began to dominate industries: Railroads, Steel, meatpacking, coal, etc. Why are monopolies a Market Failure? Monopolies destroy the key ingredient of the free market system- Competition. To fix this MARKET FAILURE the government must get involved.

WHAT DOES THE GOVERNMENT DO? Legislative Branch Passed laws designed to stop monopolies Sherman Act of 1890- “Every person who shall monopolize …or conspire to monopolize…shall be deemed guilty of a felony.” Executive Branch The Federal Trade Commission must approve all corporate mergers. (Like AT&T and…) When firms use anti-competitive tactics the Department of Justice files suit against them. Judicial Branch Supreme Court finds the firm guilty or not guilty and assigns a punishment.

2004 A#1

2004 A#1 Negative – Two Costs Curves MSC=MSB; Q2, P = 12 MR=MC, MPC=MR, Q1, P =13 Subsidize $3