market failure #3 monopolies 1. monopoly monopoly review 1.draw a monopoly making a profit. label...
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Antitrust Laws 3TRANSCRIPT
Market Failure #3
Monopolies
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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
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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
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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
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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
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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
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MR