monopoly

Introduction:

Monopoly is when one firm controls a market, and is said to have price maker power.  The market is said to be concentrated.

A working definition is any firm controlling more than 25% of its market in terms of sales revenue or turnover, thus Tesco could be said to be in a monopoly position in the supermarket industry with over 30%.

Monopoly is said to focus on profit maximisation and lowers output below and raises price above that which would be generated in a competitive market.  It can extract high profits protected behind barriers to entry, obstacles which prevent new firms coming in to compete away high profits.  These barrier tend to come in 3 forms (the 3 Ss):

1. structural barriers: natural barriers arising from the distinct characteristics of the industry such as high capital set up costs (often combined with high sunk costs - investment which is non recoverable on exit)
2. statutory barriers: legal barriers put in place by government such a licenses to operate in certain industries or Intellectual Property Rights (IPR) such a patent preventing other firms copying a process or innovation.
3. strategic barriers: artificial barriers created through firm decision making such as strong branding and heavy advertising or pricing levels aimed a discouraging new competition.

Analysis:

Negatives of Monopoly:

• Welfare loss is generated through restricting output and raising price (allocative inefficiency)
• The profit maximising incentive may also move the firm away from short run productive efficiency
• productive inefficiencies may be exaggerated by x-inefficiency of organisational slack, where the company allows cost to creep up due to a lack of competitive pressure
• the lack of choice could be seen to be another negative aspect of monopoly

Positives of Monopoly

• Economies of Scale

• Dynamic Efficiency: High profits are used for research and development in products and processes which drive down costs and create new choices for society in the future

If the government decides the monopoly on balance is not in the public interest there are a range of policy options open to it:

Policy:

• Tax: Not a shift to the left of the supply curve because this is a tax on income (profit) for the business owners.  A windfall tax has been used against the banking industry recently.
• Remove barriers to entry: easy when these are statutory barriers
• Privatise: creates incentive to be efficient, especially when combine with the removal of barriers to entry
• Nationalise: make profits for the government or lower prices towards welfare maximisation
• Regulate: prevent monopolies being created which are not in the consumer interest or monitor existing monopolies to make sure they are acting in the public interest

End Evaluation:

Capitalism has a natural tendency towards concentration.  Global markets means it is large companies that have the resources to compete at this level.  Anti-monopoly legislation perhaps also needs a global architecture.  Low prices and choice is perhaps best generated through a competitive oligopoly where a small number of large firms dominate a particular market



Inequality and equity 2 -the labour market

Inequality and Equity 1 - The Housing Market

Merit Good - health and education in society

Higher Education Case Study
Introduction:
The introduction of tuition fees at £9000 per annum for university study could be an area of discussion on this years econ 1 paper.

Basic merit good arguments apply (see the last post on healthcare) but here the state is moving away from free provision towards charging individuals for their study.

It is felt there are clear merit good arguments for education to 16 (or indeed 18 with legislation to be phased in over the next couple of years) thus making it a legal requirement and providing it free makes sure the "right" quantity of education is consumed.  National Curriculum and inspection by OFSTEAD works on quality within this framework.

Higher education provision is not so clear cut - the government feels the benefits are more private in nature thus students should make more of a contribution to the cost.

There are  equity issues here in that it maybe only those from above average incomes may take the risk of investing in degrees.  Thus the government has built in some means-testing and suggested a quota system or positive discrimination to support children from lower socio-economic groups.

The impact of the introduction of tuition fees will only be known in the longer term.  The rise in youth unemployment may be enough to encourage more students into education as a way of dealing with a lack of job opportunity although many graduates are now struggling to find work.

Will we see the death of the liberal arts degree as students seek a greater return on their investment from more technical subjects??

Highly skilled and flexible workers are the key to sustainable growth in a competitive global environment - clear positive externalities of higher education exist in this sense.

Basic Analysis:

NHS Case Study
Introduction:
The central provision of healthcare since WWII under the NHS follows the themes of:

• equity - where every individual has the right to a certain level of care regardless on income
• merit good - where the state deals with failures in the form of information issues related to externalities and an underestimation of private benefit
• asymmetric information: doctor have all the information thus may make decisions motivated by financial goals
• moral hazard: insurance markets have difficulty dealing with the unique challenge of affordable healthcare cover.
• economies of scale - bigger is better for unit cost

Analysis:

Policy:

• subsidy

• zero price provision

Conclusion:
the NHS has delivered effective care for the UK population for over 60 years but is facing a triple threat:

• increased demand from an ageing population
• increasing costs from ever more complex drugs, technology and procedures
• austerity challenging total expenditure in the face of the above two issues

Efficiency gains through reorganisation and the use of private sector providers on partnership with the public sector is seen as a model to provide healthcare for the 21 century but is proving difficult to achieve both practically and politically. other resources: health care:
http://www.oheschools.org/ohe.pdf

nhs for sale (panorama)

nhs postcode lottery (panorama)

sicko michael moore (trailer)

briefing (michael moore

bbc archive nhs

education
tested to destruction? (panorama)

back to school (panorama)

uk alcohol strategy

Home Office Strategy page + strategy paper

demerit goods - focus on alcohol and tobacco

drinking
10 approaches to binge drinking
younge people and drinking
alcohol effects (bbc)

effects of alcohol

ready steady drink (bbc3)

bbc resources on binge drinking





1) ban prohibition
resticting consumption (res)


2)licensing laws + changing attitudes


24 hour drinking one year on (bbc 11/06)


impact of changes (bbc 11/06)


law change not changing habits (bbc 11/06)


alcohol attitudes in europe (bbc 11/07)


3) marketing and advertising


booze marketing ban (bbc 09/09)


the power of marketing (bbc 09/09)


4) minimum prices


alcohol minimum price (bbc 03/09) at a glance


eu ruling on minimum prices (smoking) ft 05/03/10



5) taxes


finlands u turn on alcohol tax (bbc 02/09)


alcohol tax rise (bbc 10/07)


impact of tax rises (guardian 03/08)


prices do not cut drinking (bbc jan 06)


6) legisaltion on age


call to raise drinking age to 21 (bbc 03/07)


7) state run monopoly


3 countries compared (bbc 11/05)








is state advertising effective (c4 june 2010)


minimum prices introduced

smoking
should we ban smoking (project sydicate nov 2011) + mp3 file

smoking video resources

cigarette warnings


bbc 50 years of anti smoking advice mar 2012

Environmental Issues and Policy

Public Goods Environment and Climate Change

climate change and macro + fiscal effects

The Stern Report 2007
the stern review on the economics of climate change was hailed as a wake up call for the impact our present approach has on the environment and criticised many traditional methods of "internalising the externality" such as taxes. You can listen to the lecture and see the powerpoint presentation at the link below:

video of stern lecture

the full report is available from:

Stern Review on the economics of climate change

stern and climate change:

powerpoint on the dangers climate change

climate change presentation (t2u) handout (pdf)




government spending by department

audio tour

Econ 1 Revision - Definitions and Diagrams

tutor2u revision day material econ 1