1. Introduction to Economics
Eurostat, Luxembourg
9 – 11 November 2015
CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE EUROPEAN COMMISSION

2. The Economic way of thinking

3. What is “Economics”?
A science that deals with the optimal allocation, or use, of scarce resources for the purpose of satisfying individuals and society’s needs and wants. 3

4. What is Scarcity? Scarcity – a basic human dilemma
Limited resources vs. unlimited wants
The human condition requires making choices
Scarcity requires all societies to answer the following questions:
What is to be produced?
How is to be produced?
For whom will it be produced?

5. Resources – Factors of Production
Natural resources (Land)– “free gifts of nature”
Land, minerals, oil, forests, air, and timber
Capital Resources – “manufactured aids to production”
Tools, machines, equipment, factories
Things used in producing goods and services and getting them to consumers.
Human Resources (Labor)– “mankind’s physical and mental talent”
These are the skills people have that are used to produce goods and services.
Entrepreneur – the individual who combines the factors of production in order to produce a good or service.
Risk taker, policy maker, and innovator

6. Factors of Production Land Labor Capital Rent Wages Profit INCOME
Payments
to factors
of Production
Land
Labor
Capital
Enterprise
Rent
Wages
Interest
Profit
INCOME

7. Scientists versus policy makers
Why do Economists Study Human Behavior?
Scientists versus policy makers
Positive Economics
Descriptive - what the world is like.
Objective- value judgments need not be made
Normative Economics
Prescriptive - what the world ought to be like
Subjective – value judgments must be made

8. Microeconomics that deals with behavior and decisions of smaller unit like individuals and businesses.
Families, businesses, and communities
Taxes, subsidies, regulated prices impact on individual decisions
Macroeconomics that deals with economic theory and the economic decisions of large bodies like the government.
Domestic and open economies
Countries and their governments
Trade between countries

9. Categories of Basic Principles of Economics
How do people make decisions?
How do people interact?
How does the economy work overall?
 Mankiw’s “10 Commandments of Economics”

10. Today
Principles #1-#4: How Do People Make (Individual) Decisions? Principles #5-#6: How Do People Interact? (Definition of “Market”) Principle #7: When can market be inefficient? Principle #8-#10: What does affect the economic performance of an “economy”?

11. Principle #1 - People face tradeoffs: - Time allocation– an example of tradeoffs - Production Possibilities Frontier

12. Individual trade-off examples!
Cinema or theater?
Sea or mountain?
Tiramisù or cheesecake?

13. An Island of fishermen and farmers
We consider an island where 5 adult people live. They can either work as fisherman or farmer. Each fisherman produces in average 5kg of fish per day, each farmer produces in average 10kg of food per day.
 What are all the possible combinations of production that we can get in the island?

14. An Island of fishermen and farmers
Fish/Farm 1 2 3 4 5
0,0
0,5
0,10
0,15
0,20
0,25
10,0
10,5
10,10
10,15
10,20
10,25
20,0
20,5
20,10
20,15
20,20
20,25
30,0
30,5
30,10
30,15
30,20
30,25
40,0
40,5
40,10
40,15
40,20
40,25
50,0
50,5
50,10
50,15
50,20
50,25
 What is feasible? What is not?
 What is efficient? What is not?
 What is the optimal allocation of resources?

15. Production Possibility Frontiers
Capital Goods
Tradeoff:
from A to B Ym A Yo B Y1 Xo X1 Xm
Consumer Goods

16. Production Possibility Frontiers
Show the different combinations of goods and services that can be produced with a given amount of resources
No ‘ideal’ point on the curve
Any point inside the curve – suggests resources are not being used efficiently
Any point outside the curve – not attainable with the current level of resources
Useful to demonstrate economic growth and opportunity cost

17. D: Product Inefficiency
Capital Goods A Y1 C B Yo Xo X1
Consumer Goods

18. D: Economic Growth
Capital Goods D A
Consumer Goods

19. Principle #2 - The cost of something is what you have to give up to get it
Opportunity cost (or alternative cost) comes from F. Von Weiser, defined as the cost of one choice in terms of the opportunity foregone in the next best choice.
Opportunity cost is not the sum of the available alternatives, but rather of the benefit of the best alternative.
Opportunity costs are independent of monetary units

20. entering the labor market?
Attending college or
entering the labor market?
Ew2
Ew1
G P

21. Ew2
Ew1
G P 21

22. Ew2
Ew1
G P 22

23. Principle #3 - Rational people think at the margin
Rational or irrational decision-making
Marginal benefits and costs versus total benefits and costs
Comparing marginal costs and benefits leads to maximizing net benefits (total welfare)
Example: the “sushi portions”

24. Pleasure/utility from eating a single portion of sushi
 marginal/additional benefit €
Marginal Surplus
Price for a single portion of sushi
Marginal cost X*

25. Principle #4 –People respond to incentives
Reactions to changes in marginal benefits and costs
Increases (decreases) in marginal benefits mean more (less) of an activity
Increases (decreases) in marginal costs mean less (more) of an activity

26. Why people commit illegal acts?
*Becker’s Economic Model of Crime
In many context, decisions are affected by uncertainty. Gains and losses don’t depend only on personal efforts and skills but, as in the lottery, “the fate” matters!
EXAMPLE:
Legal Salary: 1000€
Gains from a Crime: 24000€, but with a probability of 1/3, I can be “punished” and I should stay 2 years and 6 months in a jail (we evaluate this as a los of 30000€).

27. *Becker’s Economic Model of Crime
In this case, expected gains from crime are higher than the ones warranted by the “legal job”, then it is rational to commit the crime:
2/3 x /3 x (-30000)= 6000 >1000
 Accepting this approach, how we can reduces the probability that crimes occur?

28. Why people commit illegal acts?
Effective Punishment
Probability to be punished
Social cost of punishment
Reward of crime
Probability of success
Level of social approval or tolerance of specific crimes
Preferences
Education
Social capital

29. Principle #5 - Trade can make everybody better off
Adam Smith author of the “An Inquiry into the Causes and Consequences of the Wealth of Nations”, introduced the idea that “in a free market, any trade is free and gives surplus to both seller and consumer!”

30. Maria has always dreamed of getting a portrait.
Carlo is a student of fine arts and is happy to paint the portrait of anyone who can pay at least 25 €
Maria has always dreamed of getting a portrait.
She would be willing to pay up to 100 € for it.
There exists «room» for a free trade?
Who gains from the trade?
Yes, 100>25 and the trade creates a
total surplus of =75

31. Trade creates a total surplus of 75? How the market splits this surplus?
 How many painters we have in the market?
How many potential consumers we have in the market?
There are some commercial law that regulates the market?

32. Principle #6 - Markets are usually a good way of organizing economic activity
the “historical” benefits of trade are so powerful that people began to trade
The market is one but not the unique mechanism to allocate goods and services
“Competitive” markets are efficient

33. «Competitive market»?
Under suitable assumptions, a market is competitive when the numbers of consumers and producers are sufficiently high such that none is a pricemaker and can abuse of a dominant position.  Prices reflect the marginal costs of production.  All the consumers that have a willingness to pay not lower than the market price get the product.  All the producers that have a marginal cost not higher than the market price supply the product.

34. Market efficiency
Market price in a free market allows the maximum level of free exchanges (money for product, product for money), with non-negative surplus for all producers and consumers.
The surplus creates is maximum!
All the mutually-profitable exchanges take place!

35. About Markets
Principles 1-5 combine with markets to turn the pursuit of self-interest into promoting the interests of society
Adam Smith and the “invisible hand”
creativity and productivity are stimulated by the pursuit of self-interest into improving resource allocations
“compete or be obsolete”
 in some cases markets fail to allocate resources effectively so,….

36. *A focus on alternative rationing systems of allocation of goods and services: - Planned Economies - Free Market Economies - Mixed Economies

37. *Planned Economies Sometimes called  a centrally planned economy or
 a command economy
Decisions as what to produce, how to produce, and who to produce for, are made by a central body, the government.
All resources all collectively owned.
The quantity of decisions to be made, data to be analyzed, and factors of production to be allocated are immense. This makes central planning very difficult.

38. *Free Market Economies
Sometimes called:
 a private enterprise economy
 capitalism
All production is in private hands
It is a self-righting system

39. *Mixed Economies In reality, all economies are mixed economies
Some countries have high levels of planning and government involvement in the economy (eg. China)
Government involvement is deemed essential, since there are some dangers that will exist if the free market is left to operate without interference.

40. *Transition Economies
Countries that have been moving towards a more market-oriented balance in their economic systems.
Examples of countries that are in transition: Hungary, Poland and Russia

41. Disadvantages of a Free Market Economy
Demerit goods (things that are bad for people, such as drugs or child prostitution) will be over- provided, driven by high prices and thus a high profit motive.
Merit goods (things that are good for people, such as education or healthcare) will be underprovided, since they will only be produced for those who can afford them and not for all.

42. Disadvantages of a Free Market Economy
Resources may be used up too quickly and the environment may be damaged by pollution, as firms seek to make high profits and to minimize costs.
Some members of society will not be able to look after themselves, such as orphans, the sick, and the long-term unemployed, and will not survive.
Large firms may grow and dominate industries, leading to high prices, a loss of efficiency, and excessive power.

43. Disadvantages of a Planned Economy
Total production, investment, trade, and consumption, even in a small economy, are too complicated to be planned efficiently and there will be misallocation of resources, shortages, and surpluses.
Because there is no price system in operation, resources will not be used efficiently. Arbitrary decisions will not be able to make the best use of resources.

44. Disadvantages of a Planned Economy
Incentives tend to be distorted. Workers with guaranteed employment and managers who gain no share of profits are difficult to motivate. Output and/or quality will suffer.
The dominance of the government may lead to a loss of personal liberty and freedom of choice.
Governments may not share the same aims as the majority of the population and yet, by power, may implement plans that are not popular, or are even corrupt.

45. Principle #7 Governments can sometimes improve interaction that occurs in markets
There are circumstances when market signals fail to allocate resources efficiently or equitably
 Public Goods, Externalities, Monopolies.
Some goods or services that people desire will not be produced by markets (e.g. lighthouses).
Some goods or services will either be underproduced (vaccines) or overproduced (pollution) because markets fails to register certain benefits or costs.
And,
 Inequality in income distribution, poverty, unemployment, inflation.

46. Market Failures:
markets may also fail to provide an equitable or fair distribution of resources
government intervention with its ability to coerce (the opposite of voluntary) can regulate, tax and subsidize to change market outcomes
efficiency and equity
 if government intervention always the proper solution? Non-market failures!

47. Competitive Markets and efficiency

48. Demand, Supply and Market Equilibrium
Demand reflects buyer’s decision making
Supply reflects seller’s decision making
Put supply and demand together, we have a market

49. Demand
The amount of a good or service that consumers are willing and able to purchase during a given period of time is called quantity demanded.
We will simplify demand analysis by focusing on six critical factors that influence quantity demanded: current product price, expected product price, prices of substitute goods, price of complementary goods, average income of consumers, number of consumers.

50. Two Types of Demand Functions
Generalized Demand Functions – which show how quantity demanded is influenced by the price of the product and some other factors.
Ordinary Demand Functions – which focus on the relationship between price and quantity demanded, holding other factors constant.

51. Factors Influencing Demand Decisions
Price of the considered good -
Prices of substitute goods +
Prices of complementary goods –
Preferences +
Price expectations (the reverse of prices impacts!)
Number of buyers +
Average income + but also -
Income distribution ?

52. Demand and Current Price
If consumers observe an increase in the current level of demand typically decreases (ordinary goods)
Exception: Giffen’s goods
Demand and Price Expectations
If consumers perceive that an increase in prices is likely in the future, the current level of demand will increase.

53. Demand and Price of Related Goods
For complements, price and demand are inversely related.
For substitutes, price and demand are positively related.
Demand and Number of Buyers
If the number of buyers increase, demand will increase.

54. Demand and Income
For normal goods, income and demand are positively related.
For inferior goods, income and demand are inversely related.
In aggregate also income distribution matters!

55. Demand Functions
Demand or the demand function is the relationship between price and quantity demanded, holding other factors constant.
Table: see slide following
Graph: see slide following
Equation: Qd= P

56. Demand Schedule
Price
Qd= P
2000 25
1500 50
1000 75
500
100

57. Demand Curve
Q = P P Q

58. Changes in Demand vs Changes in Quantity Demanded
A change in the price of the product, results in a movement along the demand curve and is said to result in a change in quantity demanded.
A change in any of the other factors in the demand function , results in a shift in the demand curve and is said to result in a change in demand.

59. Supply
Quantity supplied is the amount of a good or service offered for sale in a market during a given period of time.
The quantity of a good offered for sale is based on six factors.
Prices in the supply curve represent the marginal cost of production for producers

60. Factors Influencing Supply Decisions
Price +
Input prices -
Prices of related goods in production
– for substitutes (wheat and corn)
+ for complements (oil and gas)
Technology +
Price expectations -
Number of sellers +

61. Change in Supply versus Change in Quantity Supplied
A change in price causes a change in quantity supplied and is reflected by a movement along a fixed supply function.
A change in any of the determinants of supply causes a change in supply and is reflected by a shift in the supply function.

62. Supply Schedule Price Q Supplied 65 750 60 700 50 600 40 500 30 400 20
300 10
200

63. Supply Curve P S Q

64. Market Equilibrium S P* D Q*
In Valentine's Day, although the price of roses increases, many more roses are sold. Why? In this case we have a positive demand shock.
Increases when the price of oil increases, so does the price of gasoline. It measures a reduction of the gasoline sold, actually not so significant. Q*

65. Excess Supply-SurplusD
Q1=Qd Q* Qs

66. Excess Demand-ShortageP* P2 D
Q1=Qs Q* Qd

67. Welfare evaluations
Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good.
Producer surplus is the total benefit or revenue that producers receive beyond what it cost to produce a good.
Welfare is the sum of consumer and producer surplus
A Market is efficient if it maximizes welfare
A Market is efficient it maximizes the number of free trades

68. Consumer surplus

69. Producer surplus

70. Maximum Price lower than market price

71. Minimum price higher than market price
Excess Supply - Surplus

72. Tax incidence St
Pb=Ps+t
Ps=Pb-t
Pb-Ps=t

73. Market Failures

74. Market Failures
A market failure is a situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes
Externalities
Public goods
Imperfect information
Monopoly power

75. Externalities
Externalities are the effects of a decision on a third party that are not taken into account by the decision-maker
Negative externalities occur when the effects are detrimental to others
Ex. Second-hand or passive smoke and carbon monoxide emissions
Positive externalities occur when the effects are beneficial to others
Ex. Education

76. A Negative Externality Example
When there are negative externalities, the marginal social cost differs from the marginal private cost
The marginal social cost includes the marginal private costs of production plus the cost of negative externalities associated with that production
It includes all the marginal costs that society bears

77. A Negative Externality Example
Cost, P
S1 = Marginal Social Cost
S0 = Marginal Private Cost P1
Cost of externality P0
D = Marginal Social Benefit Q Q1 Q0

78. A Positive Externality Example
When there are positive externalities, the marginal social benefit differs from the marginal private benefit
The marginal social benefit includes the marginal private benefit of consumption plus the benefits of positive externalities resulting from consuming that good
It includes all the marginal benefits that society receives

79. Benefit of externality
A Positive Externality Example
Cost, P
S = Marginal Private Cost P1
Benefit of externality P0
D1 = Marginal Social Benefit
D0 = Marginal Private Benefit Q Q0 Q1

80. Methods of Dealing with Externalities
Incentive policies
Tax incentives
Market incentives
Direct Regulation
Voluntary solutions
The Coase’s Theorem

81. Tax Incentive Policies
Cost, P
S1 = Marginal Social Cost
S0 = Marginal Private Cost P1
Efficient tax P0
D = Marginal Social Benefit Q Q1 Q0

82. Market Incentive Policies
A market incentive plan is similar to direct regulation in that the amount of the good consumed is reduced
A market incentive plan differs from direct regulation because individuals who reduce consumption by more than the required amount receive marketable certificates that can be sold to others
Incentive policies are more efficient than direct regulatory policies

83. Voluntary Reductions
Voluntary reductions allow individuals to choose whether to follow what is socially optimal or what is privately optimal
The socially conscious will often become discouraged and quit contributing when they believe a large number of people are free riding
Free rider problem is individuals’ unwillingness to share the cost of a public good

84. The Optimal Policy
An optimal policy is one in which the marginal cost of undertaking the policy equals the marginal benefit of that policy
Resources are being wasted if a policy isn’t optimal
For example, the optimal level of pollution is not zero pollution, but the amount where the marginal benefit of reducing pollution equals the marginal cost

85. Public Goods A public good is nonexclusive and nonrival
Nonexclusive: no one can be excluded from its benefits
Nonrival: consumption by one does not preclude consumption by others
Many goods provided by the government have public good aspects to them
There are no pure public goods; national defense is the closest example

86. Public Goods
Once a pure public good is supplied to one individual, it is simultaneously supplied to all
In the case of a public good, the social benefit of a public good (its demand curve) is the sum of the individual benefits (value on the vertical axis)
To create market demand,
private goods: sum demand curves horizontally
public goods: sum demand curves vertically

87. The Market Value of a Public Good
Price
€1.20
The Market Value of a Public Good
€1.10
€1.00
€0.80
€0.60
Market Demand
€0.40
Demand B
$0.60
€0.50
€0.20
Demand A
Quantity 1 2 3

88. Informational Problems
Perfectly competitive markets assume perfect information
In the real world, buyers and sellers do not usually have equal information, and imperfect information can be a cause of a market failure
Adverse selection (hidden information)
Moral Hazard (hidden action)

89. Strategical
Thinking

90. A Game Four elements to describe a game: players;
rules: when each player moves, what are the possible moves, what is known to each player before moving;
outcomes of the moves;
payoffs of each possible outcome: how much money each player receive for any specific outcome.

91. Prisoners’ Dilemma
Two individuals have been arrested for possession of guns. The police suspects that they have committed 10 bank robberies;
If nobody confesses to the police, they will be jailed for 2 years for possession of guns.
If only one confesses, she’ll go free and her partner will be jailed for 40 years.
If they both confess, they get 16 years.

92. Bonnie C N Clyde -16,-16 0,-40 -40,-0 -2,-2
Matrix Representation of the Prisoners’ Dilemma
Bonnie C N
Clyde
-16,-16
0,-40
-40,-0
-2,-2

93. Matrix Representation of Prisoners’ Dilemma
Bonnie C N
Clyde
-16,-16
0,-40
-40,0
-2,-2

94. Matrix Representation of Prisoners’ Dilemma
Bonnie C N
Clyde
-16,-16
0,-40
-40,0
-2,-2

95. Matrix Representation of Prisoners’ Dilemma
Bonnie C N
Clyde
-16,-16
0,-40
-40,0
-2,-2

96. Dominated and Dominant Strategy
a strategy that gives higher payoffs no matter what the opponent does;
Dominated Strategy:
a strategy is dominated if there exists another strategy that is dominant.
So far we have only assumed that each player is rational to determine the outcome of the game.

97. A Modified Prisoners Dilemma:  Clyde is proud of not confessing (+4)
Bonnie C N
Clyde
-16,-16
0,-40
-36,-0
2,-2

98. Dominated and Dominant Strategy
In this case there is no dominant strategy for Clyde.
But, for Bonnie confess is still a dominant strategy.
Suppose that Clyde knows that Bonnie is rational and will choose to confess.
Since Clyde knows that Bonnie will choose to confess, can we determine the outcome of the game?

99. Solutions of the Games
To predict what will be the solution/outcome of the game we need some tools:
dominated and dominant strategies;
Nash equilibrium.

100. Nash Equilibrium
The decisions of the players are a Nash Equilibrium if no individual prefers a different choice.
In other words, each player is choosing the best strategy, given the strategies chosen by the other players.

101. No Dominant Strategies
In most games there are no dominant strategies for all players.
We cannot use this method to predict the outcome of the game.

102. No Dominant Strategies
Player 2 L C R
Player 1 T
0,7
2,0
9,3 M
7,0
4,4
5,3 B
8,5
3,5
6,6

103. No Dominant Strategies
Player 2 L C R
Player 1 T
0,7
2,0
9,3 M
7,0
4,4
5,3 B
8,5
3,5
6,6

104. Boeing-Airbus game
Boeing and Airbus have to decide whether to invest in the development of a Super Jumbo for long distance travel;
If they both develop successfully the new plane, their profits will drop by 50 millions a year;
If only one develop the Super Jumbo, it will make 80 millions a year in additional profits, whereas the profits of the other firm will drop by 30 millions a year;
If no firm develops the plane, nothing changes.

105. Matrix Representation of Boeing-Airbus game
Develop
Do not develop
Boeing
-50,-50
80,-30
-30,80
0,0

106. …Other games for the class.

107. *Behavioral Game Theory: What do People Really Do?

108. *Behavioral Game Theory and Game Practice
Game theory: how rational individuals should behave but…who are these rational individuals?
BGT: looks at how people actually behave
 experiment by setting up real economic situations
 account for people’s economic decisions
 don’t break game theory when it works
 Fit a model to observations, not “rationality”

109. *Beauty Contest Analysis
Some number of players try to guess a number that is 2/3 of the average guess.
The answer can’t be between 68 and no use guessing in that interval. It is dominated.
But if no one guesses in that interval, the answer won’t be greater than 44.
But if no one guesses more than 44, the answer won’t be greater than 29…
Everyone should guess 0! And good game theorists might…
 But they’d lose…

111. *Ultimatum Game
Two players bargain (anonymously) to divide a fixed amount between them.
P1 (proposer) offers a division of the “pie”
P2 (responder) decides whether to accept it
If accepted both player gets their agreed upon shares
If rejected players receive nothing.

112. What do game theorists say?
Ariel Rubenstein (1982)
showed that there exist a unique subgame perfect Nash equilibrium solution to this problem
D= ( -  , )
So the rational solution was predicting that proposer should offer the smallest possible share and responder would accept it.

113. Experimental data is inconsistent !
Güth, Schmittberger, Schwarze (1983)
They did the first experimental study on this game.
The mean offer was 37% of the “pie”
Since then several other studies has been conducted to examine this gap between experiment and theory.
Almost all show that humans disregard the rational solution in favor of some notion of fairness*.
The average offers are in the region of 40-50% of the pie
About half of the responders reject offers below 30%

114. Monopoly and monopoly power

115. Monopoly One seller - many buyers One product (no good substitutes)
Barriers to entry
Price Maker

116. Monopoly
The monopolist is the supply-side of the market and has complete control over the amount offered for sale
Monopolist controls price but must consider consumer demand
Profits will be maximized at the level of output where marginal revenue equals marginal cost

117. Average and Marginal Revenue
The monopolist’s average revenue, price received per unit sold, is the market demand curve
Monopolist also needs to find marginal revenue, change in revenue resulting from a unit change in output

118. Average and Marginal Revenue1 2 3
€ per
unit of
output 4 5 6 7
Marginal
Revenue
Average Revenue (Demand)
Output 1 2 3 4 5 6 7

119. Monopoly Pricing PM P* QM Q* 1 2 3 4 5 6 7 Average Revenue (Demand)1 2 3
€ per
unit of
output 4 5 6 7
Average Revenue (Demand)
Marginal
Revenue PM
Marginal Cost P*
Output 1 2 3 4 5 6 7 QM Q*

120. Monopoly Power Pure monopoly is rare
However, a market with several firms, each facing a downward sloping demand curve, will produce so that price exceeds marginal cost
Firms often product similar goods that have some differences, thereby differentiating themselves from other firms

121. Measuring Monopoly Power
Could measure monopoly power by the extent to which price is greater than MC for each firm
Lerner’s Index of Monopoly Power
L = (P - MC)/P
The larger the value of L (between 0 and 1) the greater the monopoly power

122. The Social Costs of Monopoly Power
Monopoly power results in higher prices and lower quantities
However, does monopoly power make consumers and producers in the aggregate better or worse off?
We can compare producer and consumer surplus when in a competitive market and in a monopolistic market

123. The Social Costs of Monopoly
Perfectly competitive firm will produce where MC = D  PC and QC
Monopoly produces where MR = MC, getting their price from the demand curve  PM and QM
There is a loss in consumer surplus when going from perfect competition to monopoly
A deadweight loss is also created with monopoly

124. DWL from Monopoly Power€
AR=D MR
Lost Consumer Surplus MC
Because of the higher price, consumers lose A+B and producer gains A-C.
Deadweight
Loss Pm Qm B A QC PC C
Quantity

125. The Social Costs of Monopoly
Social cost of monopoly is likely to exceed the deadweight loss
Rent Seeking. Firms may spend to gain monopoly power:
Lobbying
Advertising
Building excess capacity

126. The Social Costs of Monopoly
The incentive to engage in monopoly practices is determined by the profit to be gained
The larger the transfer from consumers to the firm, the larger the social cost of monopoly

127. The Social Costs of Monopoly
Government can regulate monopoly power through price regulation
Recall that in competitive markets, price regulation creates a deadweight loss
Price regulation can eliminate or reduce deadweight loss with a monopoly

128. A decreasing average or unit cost of production
Natural Monopoly
In some cases, given firms cost structure, it is more efficient that only one producer sells the product (economic of scale) €
A decreasing average or unit cost of production Q

129. Natural monopoly
Having only one producer is efficient in terms of production, while the efficiency in terms of distribution of the good required a market price «very close» to the minimum marginal cost.
State-owned monopolies
Private-owned regulated monopolies