Market And Market Failure Case Study
What is Market and Market failure?
Market is an institution where consumers and producers exchange commodities 1(Gravelle and Rees 2004, p.314). Adam Smith has stated in the First fundamental theorem of welfare economics, 2 that “any competitive equilibrium leads to a Pareto efficient allocation of resources, a policy existing in a situation where markets are complete. A uny competitive equilibrium is a necessarily pareto optimal “(Andreu Mas-Cole11 Michael D. Whinston and Jerry R. Green 1995 p.308). Therefore, the concept of competitive equilibrium provides us with the notion of market equilibrium in competitive market economies.
However; In the real world, when there is lack of optimum welfare due to constraints in the working of perfect
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The key differences between monopoly and perfect competition is that since the monopoly is the only firm producing a certain product without a substitute, it can influence and charge the market price and charge to be whatever the monopoly impose to be suitable for maximizing its profits.
Monopoly power have several forms, every type has its own reason to be established; Nevertheless, all Monopoly types generate the same outcome. We can find: Natural Monopoly, Public Monopoly, Private Monopoly Technological Monopoly, Geographic Monopoly
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(p439 Varian)
• Price regulation and taxation: the governments can reduce prices of the monopoly to the competitive level by impose price ceiling so that monopoly price to an equal price of competitive price, by imposing a lump sum tax with disregard to the output of the monopolist or proportional to the output. In either case, the aim is to bring monopoly price to the competitive level.
• Regulation of quality of service: The government can impose a standard of quality and service on the monopolistic firms. 20
• Promote competition: The government can spur new companies to enter the market.
• Capping price by regulators RPI-X: The regulator can set price increases according to the state of the industry and potential efficiency of savings. If a firm cut costs by more than X, they can increase their
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