Market Failure #3 Monopolies 1. Monopoly Monopoly Review 1.Draw a monopoly making a profit. Label price, output, and profit. 2.Identify three specific.

Market Failure #3

Monopolies

1

Monopoly Monopoly Review1. Draw a monopoly making a profit. Label

price, output, and profit.2. Identify three specific reasons why

monopolies are bad.3. Label the Fair Return price and output.4. Label the Socially Optimal price and

output.5. Explain why taxing a monopoly is a bad

idea.

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Antitrust Laws

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What are Antitrust laws?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.•Sherman Act of 1890- “Every person who shall monopolize …or conspire to monopolize…shall be deemed guilty of a felony.”

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.

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Regulating Monopolies

8Copyright ACDC Leadership 2015

How do they regulate?•Use Price controls: Price Ceilings•Why don’t taxes work?

•Taxes limit supply and that’s the problem

Why Regulate?Why would the government regulate

an monopoly? 1. To keep prices low 2. To make monopolies efficient


1.Socially Optimal PriceP = MC (Allocative Efficiency)

Where should the government place the price ceiling?

2. Fair-Return Price (Break–Even)P = ATC (Normal Profit)

OR


QD

MCATC

P

Natural Monopoly

11Qsocially optimal

One firm can produce the socially optimal quantity at the lowest cost due to economies scale.

It is better to have only one firm because ATC

is falling at socially optimal quantity

Copyright ACDC Leadership 2015

MR

QDMR

MCATC

P

Natural Monopoly

12Qsocially optimalCopyright ACDC Leadership 2015

Unregulated

Socially Optimal

Fair Return

QM QFR

PM

PFR

QSO

QD

MCATC

P

Regulating a Natural Monopoly

13Qsocially optimal

What happens if the government sets a price ceiling to get the socially optimal quantity?

The firm would make a loss and would require

a subsidy

Pso

Copyright ACDC Leadership 2015

MR

Market Failure #3 Monopolies 1. Monopoly Monopoly Review 1.Draw a monopoly making a profit. Label price, output, and profit. 2.Identify three specific.

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