Market Power Market Failure and General Equilibrium Chapter

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Market Power, Market Failure, and General Equilibrium Chapter 9

Market Power, Market Failure, and General Equilibrium Chapter 9

Market Power • The process of exploiting an advantage to give an individual some

Market Power • The process of exploiting an advantage to give an individual some control in the market • Gives a larger portion of social products to the powerful • Makes the economy less efficient

Monopolies & Monopsonies • Represent an extreme form of market power • Monopoly: one

Monopolies & Monopsonies • Represent an extreme form of market power • Monopoly: one seller in a market • Monopsony: one buyer in a market • Both monopolies and monopsonies can charge a price and produce a quantity that is most beneficial to the producer, not to society.

Natural

Natural

Naturally Occurring Market Power in an Industry • Increasing Returns to Scale: When inputs

Naturally Occurring Market Power in an Industry • Increasing Returns to Scale: When inputs are increased by m, output increases by more than m • An industry which undergoes increasing returns to scale will see increased efficiency • This, in turn, will drive many other businesses out of the industry • Creates a barrier to entry because it is harder for a new firm in the industry to get the same positive economic profit

A firm that experiences large economies of scale • call kill off all competition

A firm that experiences large economies of scale • call kill off all competition by virtue of this “head start” • It will be able to underprice any new entrant • Economies of scale can be a barrier to entry to a market • This can lead to a natural monopoly - a single supplier with no competition

Artificially created market power • Patents – don’t occur in nature, come from governments

Artificially created market power • Patents – don’t occur in nature, come from governments • Firms sometimes buy up patents to protect their market power

 • Rent-maintenance – the exploitation of institutional power to sustain a market advantage

• Rent-maintenance – the exploitation of institutional power to sustain a market advantage • Ex. Donations to Congress or other rulesmakers to prevent competition for your firm

 • Sometimes it’s not just about sustaining your advantage • Rent-seeking is when

• Sometimes it’s not just about sustaining your advantage • Rent-seeking is when you try to create an advantage that isn’t there now Lobbyists also do this

Artificially Created Market Power • Patents • Tariffs/Trade Restrictions • Laws • Discrimination/Gender Pay

Artificially Created Market Power • Patents • Tariffs/Trade Restrictions • Laws • Discrimination/Gender Pay Inequity

South Africa paid a price for this system • Loss of efficiency • Most

South Africa paid a price for this system • Loss of efficiency • Most of the population’s energy and creativity is blocked out • Pie could have been larger • Resources spent on rent-maintenance could have been better spent

Conclusion on market power • It often exists • It reduces efficiency and changes

Conclusion on market power • It often exists • It reduces efficiency and changes the equity of the market system • Understanding the effects of market power enriches our analysis of the world • We have a much more realistic model

Market Failure • Definition: when a market either doesn’t form when it is needed

Market Failure • Definition: when a market either doesn’t form when it is needed or it doesn’t work smoothly and quickly to make necessary adjustments

Public Goods • Goods which provide benefits to everyone; non-partitionable and non-excludable 1. Non-Partitionable:

Public Goods • Goods which provide benefits to everyone; non-partitionable and non-excludable 1. Non-Partitionable: Cannot be split into pieces 2. Non-Excludable: Cannot exclude anyone from using it

Free Rider • Public goods suffer from the free rider problem • If you

Free Rider • Public goods suffer from the free rider problem • If you believe you will get the benefit without paying, you might not pay • Ex. PBS - public television, National Public Radio • If everyone behaves as a free rider, the good might disappear

Externality This occurs when property rights can not be assigned or enforced • Air

Externality This occurs when property rights can not be assigned or enforced • Air rights Air can be used for breathing, or as a place to dispose waste • Ex. Smoking or polluting • A firm which pollutes has a consequence to others, but its effect is external to its own assessment of the cost of the activities