1. Market Failure #3 Monopolies

2. 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?

3. Government in Action: Antitrust Laws
Legislative Executive Judicial

4. 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 MR 4

5. 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 MR 5

6. 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 MR 6

7. 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.

8. 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.

10. 2004 A#1

11. 2004 A#1 Negative – Two Costs Curves MSC=MSB; Q2, P = 12
MR=MC, MPC=MR, Q1, P =13
Subsidize $3