Market Failure #3 Monopolies

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Presentation transcript:

Market Failure #3 Monopolies

Monopoly Monopoly Review Draw a monopoly making a profit. Label price, output, and profit. Identify three specific reasons why monopolies are bad. Label the Fair Return price and output. Label the Socially Optimal price and output. Explain why taxing a monopoly is a bad idea.

Monopoly Socially Optimal Unregulated Fair Return P MC ATC D MR Q $9 8 7 6 5 4 3 2 Unregulated P MC ATC Fair Return Profit =$6 D MR Q 1 2 3 4 5 6 7 8 9 10 3

Government in Action: Antitrust Laws Legislative Executive Judicial

WHAT ARE ANTITRUST LAWS? Why are monopolies a Market Failure? 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.” Clayton Anti-Trust Act of 1914 – Rules to follow Executive Branch The Federal Trade Commission must approve all corporate mergers. When firms use anti-competitive tactics the Department of Justice files suit against them. Judicial Branch Courts find the firm guilty or not guilty and assigns a punishment.

What about a natural monopoly? Happens when a firm produces a good using economies of scale. Firm produces a good at a lower cost than other firms. Firm has not broken any laws. Price Regulation Socially Optimal Price Set price where MC = D. May need to subsidize. Fair Trade Price Set price where ATC = D. Will not need subsidies.