The burning of wood for heat or charcoal for cooking means that the people of the house hold will be exposed to harmful effects from the smoke emitted. Perhaps the household decided to burn wood because the cost of a natural gas heater is too expensive. If a home in a developing nation was powered by a modular electric heater and the price of electricity rises so high that it is unaffordable the household will have to find an alternative. In a society with a geographic position that experiences a cold winter or season, being unable to afford electricity can lead to a consumer having to make a decision that could be harmful. Today, in many places electricity can be considered an essential good, or a need. If prices for these essential goods are so high that the population cannot afford it, there is a negative social cost. When the market for essential goods, such as food or electricity, is inefficient, there can be negative social implications. Conversely, if the good is deemed to be an essential good (like gasoline, or the ability to heat a home), the effect of an inefficient market can be devastating. The monopolistic market may be inefficient, but there will not be a large social cost. If it is a luxury good such as a sports car or a handbag, the effects are relatively minor. If this is not corrected or regulated, it could lead to a market failure.ĭepending on the type of good the market is selling, there are varying degrees of complications that may arise from market inefficiency. Those who are able to get the good have to pay a higher price, and thus are classified as having a higher willingness to pay. In this scenario, some people who want the good are not able to get it. This is called deadweight loss and occurs in a monopolistic market as a result of the restricted supply. Because the equilibrium is disrupted, both consumers and the producer suffer. The inefficiency in the market as a result of a monopoly is represented by the red triangle in Figure 1.The seller is able to both restrict the quantity available Q M from and raise the price P M. At Point B there is a monopolistic equilibrium, where one seller controls the market.Both the price ( P C) and the quantity ( Q C) reflect this equilibrium. At Point A the market is at competitive equilibrium, and the supply ( S) meets the demand ( D).The market becomes inefficient as the good or service is both more expensive and less available.įigure 1 shows what this looks like graphically: Monopolies create inefficiencies because there is no competition to ensure a "fair" price and quantity. The portion below is the amount of inefficiency experienced by the producer. The portion of the red triangle above the dotted line is the amount of inefficiency the consumers experience. Both the consumer and producer experience some inefficiency. There is less of the good (like gasoline) and it is more expensive (people are paying more at the gas station). Monopolies disrupt the equilibrium when the competition is disrupted, Point A → Point B. This allows them to artificially raise the price, even when the price of inputs such as oil, may fall.įigure 1. The monopolistic firm has the ability to control the price as they desire, due to the market power they possess. The price of gasoline is closely linked to the price of oil, which is a component of gasoline, thus as the price of oil falls, the price of gasoline typically will fall. In a perfectly competitive market, sellers are instead price takers meaning they are unable to charge the price for a good or service that they desire.įor example, imagine a consumer goes to purchase gasoline for their vehicle and there is only one firm that owns all the gasoline stations in the city. In this sense, price becomes a function of output. A firm that is able to change the price of the good or service it sells has market power. In a monopolistic setting, the single seller is able to set the price because they do not have to compete with firms offering lower prices. A lack of competition allows the firm to charge a much higher price for goods and services, thus generating more revenue. A firm that is the only supplier or seller in a market is said to have a monopoly.
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