Market Failure 3 Monopolies 1 Monopoly Review 1

Market Failure #3 Monopolies 1

Monopoly Review 1. Draw a monopoly graph making a profit. Label price, output, and profit. 2. Label the Fair-Return price and the Socially-Optimal price and each output. 3. Identify three specific reasons why monopolies are bad. 4. Why taxing a monopoly is a bad idea. 5. Are monopoly ever good? 6. What are the differences between pure monopoly and price discriminating monopoly? 2

Government in Action: Antitrust Laws Legislative Executive Judicial 3

Monopoly Socially-Optimal & Allocative Efficiency Price $9 MC Unregulated 8 ATC 7 6 5 Profit ($6) 4 3 Productive Efficiency 2 1 0 1 2 3 4 5 6 7 8 9 MR 10 11 Fair Return D 12 Quantity 4

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

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

2004 A#1 7

2004 A#1 Negative – Two Costs Curves MSC=MSB; Q 2, P = 12 MR=MC, MPC=MR, Q 1, P =13 Subsidize $3 8

WHAT ARE ANTITRUST LAWS? Laws designed to prevent monopolies and promote competition. u After the Civil War, advances in technology and transportation lead to national markets. u Eventually only a few firms began to dominate industries: Railroads, Steel, meatpacking, coal, etc. Why are monopolies a Market Failure? u Monopolies destroy the key ingredient of the free market system- Competition. u To fix this MARKET FAILURE the government must get involved. 9

WHAT DOES THE GOVERNMENT DO? Legislative Branch Ø Passed laws designed to stop monopolies Ø Sherman Act of 1890“Every person who shall monopolize …or conspire to monopolize…shall be deemed guilty of a felony. ” Executive Branch Ø The Federal Trade Commission must approve all corporate mergers. (Like AT&T and…) Ø When firms use anti-competitive tactics the Department of Justice files suit against them. Judicial Branch Ø Supreme Court finds the firm guilty or not guilty and assigns a punishment. 10

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