The Advantages And Disadvantages Of A Monopoly Economics Essay

The Advantages And Disadvantages Of A Monopoly Economics Essay Markets are the heart and soul of a capitalist or free market economy which is based on the notion of competition. Varying degrees of competition ultimately lead to different market structures with different outcomes to the market. The main market structures are perfect competition, monopolistic competition, oligopoly and monopoly, each with a different outcome to the market which leads economists to consider some market structures to be more desirable for the society such as perfect competition while others are less desirable such as Monopoly. It is often argued that monopoly restricts competition through entry barriers and therefore should be forbidden. This is supported by a strong case against monopoly as it restricts consumer choice and prevents small innovative businesses from being established. In addition, a monopoly will produce at a lower output and charge higher prices than a competitive market, with the same cost structure. This leads to a loss of economic welfare and efficiency. However, if monopolies are always assumed bad then questions of why firms seek to be monopolies and why governments accept or tolerate monopolistic firms will rise. In theory monopoly is a market with only one seller that dominates and sets price and quantity of the good. The markets demand curve is the firms demand curve and it is assumed that there are no substitutes and thus a firm is a price-maker that is motivated by profit maximisation and is supported by restrictive barriers to entry of the market that subsequently prevents competition. In reality it is hard to find a market in which some form of substitute firm or product does not exist. Therefore, the Competition Commission in the UK defines a market as a monopoly if there is a firm possessing over a 25% market share and facing no significant competition. In order to evaluate monopoly and to determine whether it should be allowed or not, it is vital to understand the characteristics of monopoly and to apply various efficiency concepts such as productive efficiency, allocative efficiency and X-efficiency to both extremes of the market structure, perfect competition and monopoly, to understand their effect on both consumer and producer surplus in the form of households and firms which consequently affect the general economic welfare. 2.0 Characteristics of Monopoly There are various characteristics of monopoly but it is mainly distinguished from other market structures by its barriers to entry. These barriers are a variety of obstacles or boundaries that prevent other firms from breaking into the monopolistic firms market, thus allowing the monopolistic firm to maintain its monopoly and therefore continue to earn supernormal profits. Sloman (2010) suggests that barriers to the entry of new firms are a must for an existing firm to maintain its monopoly position. There are a number of entry barriers that would exist in a market in different forms such as economies of scale, economies of scope, legal patents, licences, product differentiation and high start-up costs. Economies of scale are considered as one major barrier, this occurs when a reduction in unit costs depends on the output size. In such case, a large firm is most efficient and new firms cannot afford to enter the market and gain market shares. The industry may not be able to accommodate more than one producer which is known as natural monopoly. This is the case with public utilities such as water, gas, electricity where these firms have economies of scale to prevent new firms from entering the market. Economies of scope is another barrier as firms who produce a range of products are likely to achieve lower average costs of production and undercut prices to drive new firms out of the market. Proctor Gamble enjoys economies of scope as it produces hundreds of products but could afford to hire expensive skilled workers and experts who can use their skills across the product line and therefore spread the costs and lower the average total cost for each product. (Alesina and Spolaore, 2005) Patents and licences are also considered main entry barriers. The US Patent and Trademark office issues patents for 20 years period, in accordance with the 1995 GATT agreement. (USPTO, 1995) These patents give an inventor the exclusive right to produce a product for a 20 years period such as the case of the pharmaceutical giant, Pfizer, which has a patent on Viagra until 2014. (Stevens, 2007) Likewise, licences are granted by governments which allow one or a few firms to operate in a specific market under government regulations and control. Product differentiation and brand loyalty where a firm produces a differentiated product and the consumer associates that product with the brand. An example of product differentiation would be the car industry, where different firms would produce substitutes but they are not considered as perfect substitutes as required in perfect competition, so each firm would have some form of monopoly power in its product category. This is clearly evident in the luxury sport cars market such as Ferrari, Porsche and Lotus. Other forms of entry barriers may include high start-up costs for new firms in comparison with an established monopoly firm which is likely to have gained enough experience and efficiency techniques to be able to reduce costs and hence prices for any potential new firms to be able to compete. Based on the characteristics of monopoly, it is important to evaluate its economic efficiency and therefore its effect on consumer surplus and social welfare in general. In the next section, we compare the economic efficiency of both extremes of the market structure. 3.0 Economic efficiency In economic terms, monopoly and perfect competition should be judged on the extent to which they contribute to improving the human wellbeing and social welfare, therefore, it is important to assess whether the market structure is efficient or inefficient. Nellis and Parker (2006) point out that the success or failure of firms is directly affected by the extent to which they are managed efficiently. The lower the cost per unit of output, without reducing the quality of the product, the higher the economic efficiency of a firm. This is evident in a competitive market where firms strive to be economically efficient in order to survive. However, this is not the case in a monopoly which is generally considered as an inefficient market structure. This can be clarified by the following analysis of various economic terms of efficiency. 3.1 Allocative efficiency Assuming an initial distribution of income and wealth, allocative efficiency occurs at the point when it is impossible to improve overall economic welfare by reallocating resources between markets. For the whole economy to be allocatively efficient, price must equal marginal cost in every market. However, it is unlikely that a monopoly seeking profit maximisation would be allocatively efficient. A monopoly tends to restrict output below the market equilibrium to force up the prices. PRC MC AC Welfare loss MR AR=Industry demand=MU Q2 Q1 Output Figure 1 Allocative inefficiency and welfare loss Figure 1 demonstrates how a monopoly is allocatively inefficient. While a perfectly competitive market would have an output Q1 where the price P is equal to both MC and MU based on demand curve so all units produced add more to welfare (MU) than the resources they cost to make (MC). A monopolist is in equilibrium with an output Q2 where MC=MR, which means some units that would have been benefited society are no longer produced and thus an overall welfare loss. 3.2 Productive efficiency This can only be achieved if a firm uses the available techniques and factors of production at the lowest possible cost per unit of output. Lipsey (1992) states that in the context of an industry, the interpretation of productive efficiency is that firms are operating so that costs are minimized. In monopoly, in contrast to perfect competition, there are no competitive forces that would make a firm hold costs down to a minimum. PRC MC AC C2 C1 MR AR Q2 Q1 Output Figure 2 Productive efficiency Figure 2 illustrates the productively efficient output Q1 which is the minimum point of the AC curve where unit cost is C1, where the least amount of scarce resources possible are being used per unit of output. However, a monopolist will produce the profit maximising output Q2 with higher costs C2 per unit which can be passed to the consumer, hence demonstrating productive inefficiency. X-efficiency The concept of x-efficiency requires that the lowest possible prices are paid for inputs or factors of production. However, there is less incentive for a monopoly to make full use of the available technology, mainly due to lack of competition. Monopolies are more likely to be technically and productively inefficient, incurring unnecessary production costs and wasted resources. A firm could be employing too many workers or investing in machines that are never used, deeming it technically inefficient. It could be paying its workers unnecessary high wages or buying capital or raw material at unnecessary high prices. This means that the monopolists LRAC is above that which would be technically possible, therefore resources are wasted. Costs LRAC monopoly LRAC possible = X-inefficiency Output Figure 3 X-efficiency gap The x-inefficiency gap, as shown in figure 3, is considered as unnecessary production costs that a firm can reduce. In a perfectly competitive market, a firm must eliminate any form of x-inefficiency in order to survive and make normal profits. However, this is not the case with monopoly, which are able to survive while incurring unnecessary production costs and making satisfactory rather than maximum profits. The evaluation of economic efficiency of a monopoly compared to perfect competition has highlighted a number of disadvantages to support economists case against monopolistic firms. 4.0 Disadvantages of Monopoly In general, a monopolistic market structure would produce less output and charge higher prices which leads to a decline in consumer surplus and a deadweight welfare loss. The higher prices would lead to allocative inefficiency and supernormal profits, leading to reduced benefits to consumers and unequal distribution of income. This also raises a question about equity. The higher prices would exploit low income consumers and their purchasing power might be transferred to shareholders in the form of dividends leading again to unequal distribution of income. A monopoly tends to be less motivated towards economic efficiency such as cutting costs or increasing productivity. There is also a possibility that a monopoly would experience diseconomies of scale as the higher it gets bigger, their average costs increase. Further more, the lack of competition could discourage a monopoly from investing in research and development, leading to lack of innovation and worse products. However, with all the evidence against monopoly, there are still the questions of why do monopolies still exist, why firms seek to be monopolies and why do governments seem to tolerate them? 5.0 Advantages of monopoly On economic terms, perfect competition is generally regarded as more desirable than monopoly. However, monopolies are not necessarily bad, considering they are as highly motivated and public-spirited as competitive industries. Economic theory assumes that everyone is motivated by self-interest; this applies to competitive markets as well as to monopolies. Firms in competitive markets would aspire to be a monopoly by eliminating competition but this is unlikely achieved due to market forces and the absence of barriers to entry and exit. The fact that monopolies make supernormal profits allows them to invest in research and development and allows them to fund high cost investment spending into new technology. This is likely to result, if successful, in improved products and lower costs on the long run. An innovative monopoly could therefore be considered dynamically efficient over a long term as it reaps the reward of investment in research and development. Microsoft did not start as a monopoly but the introduction of Windows version 3.0 in 1990 followed by various Microsoft Office applications provided the market power to become a monopoly. Its position as a monopoly was further cemented by the continuous investment in research and development. It is generally argued that monopoly in high technology sectors is good as it provides firms with a greater incentive to invest in research and development. Patents for new ideas are normally acceptable as it encourages firms to fund the initial research and development and it allows these firms to recoup their investment. Another advantage of monopoly is economies of scale. An increased output would lead to a decrease in average costs of production, which can be passed to consumers in the form of lower prices. Likewise, cutting prices would be an advantage for a monopoly as it would increase sales and maximise economies of scale. PRC S (Perf comp) =â‚ ¬Ã‚  Ã‚ Ã¢â‚¬Å" Ã‚ C Ppc Pm LRMC (monopoly) D industry Qpc Qm MR (monopoly) Figure 4 Market equilibrium under monopoly Figure 4 shows the market equilibrium in perfect competition at output Qpc and supply = demand. A monopoly would generate economies of scale on the long run and drive down marginal costs to LRMC. A monopoly would therefore be able produce a profit maximising output Qm at a price Pm which is lower than perfect competition. Profits and consumer surplus are higher under monopoly and both consumer and producer would benefit. Kerr and Gaisford (2008) highlight the impact of international trade on domestic trade and the need for a domestic monopoly capable of generating the economies of scale required to compete in the international market. BT is a good example of domestic monopoly in the 1980s that had to invest in systems and technology to be able to compete in the international market. Also, the threat of international imports would force a domestic monopoly to set marginal revenue equal to marginal cost and reducing its prices, which is a boost to consumer surplus and social welfare. 6. 0 Conclusion Despite the fact that monopoly produces less output at higher prices and the negative implications on consumer surplus and social welfare, nevertheless, the existence of monopolies are inevitable as long as firms seek profit maximisation as well as increased market share and ultimately market dominance. In a free market economy, the chances of supernormal profits will eventually encourage other firms to attempt to break into a monopolistic market. The threat of competition or even a financial threat of a takeover will force a monopoly to become highly economic efficient. The American economist William Baumol argues in his theory of contestable markets that a monopoly may be forced over time to make the same production and pricing decisions as a competitive market would, merely due to the possibility of future competition. (Griffiths and Ison, 2001) From the above analysis, it is easy to conclude that perfect competition is productively more efficient than monopoly. However, if we take into account the substantial economies of scale that a monopoly would have, then it is more likely that a monopoly is more productively efficient than competition. In some cases, such as a natural monopoly, it is more acceptable to have just one firm as a monopoly provided that its price and productivity are regulated. Von Mises (1966) concludes that the mere existence of monopoly does not mean anything. The publisher of a copyright book is a monopolist, but he may not be able to sell a single copy, no matter how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monop ­oly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand sales to the limit which a competitive market would allow. Although monopoly is not desirable as it restricts competition and causes a reduction in consumer surplus and social welfare, it is however inevitable in a real business market that a firm would often take advantage of its strong market position to control the supply of goods or services. Monopolies are not illegal but their abuse of market power to limit competition is illegal and therefore actions by governments to regulate the market would be required. Finally, all firms are concerned with determining the price level that would give them sufficient profit while maintaining the consumers attraction and demand. This should work in the benefit of consumers and the society if regulations are in place for governments to intervene when a firm abuses its monopoly power to the detriment of consumers.

Alex and the Amazing Time Machine ?

Thank goodness I made it back in one piece. I have my brother and the world is happy again. Especially since Carl and Little Davy have been sent to the beginning of time. First, I’d like to say that I have finally and successfully finished building my time machine but there’s a story behind that: Psycho gave me this booster for the time machine to finally get it running. When I got home, I was pretty excited because I was sure that it was going to work. Unfortunately, it didn’t work. I was so frustrated and fell asleep with Scout in my arms. That same night, forgot to turn off the machine.Sometime between that and waking up this morning, my dog Scout disappeared. I was really scared and nervous but I had to go to school. Later that day, my school had a field trip to the museum. In the museum, we saw these dioramas of early man and I kept seeing this dog that looked an awful lot like Scout. I realized it was Scout and at that point it hit me that she might have go tten into the machine while I was sleeping and went back in time and became known as a â€Å"thoropulis†. The explanation behind the â€Å"thoropulis† was that it seemed to have always been searching for something or someone.My guess is that she was trying to get home. As my class was learning more and more about this â€Å"thoropulis† it hit me that it could only mean that the time machine actually worked! I was so excited to get back home because this meant one thing: I could travel in time and save my brother! When my class and I got back to the bus from the museum, the same white van that Carl and Little Davy drive turned up at the museum. Todd and I became super nervous because there was only one explanation as to why they were there: they were after me!Todd quickly hatched up a plan to distract Carl and Little Davy. He had the class get out of the bus to shield me from view. From that point, I ran back home and rushed to my room to activate the time machin e. By accident in panic, I set it two years in the future instead of setting it to six weeks in the past. Once I was zapped to the future, I found myself in my bedroom except things looked a little different and looked A LOT nicer. When I stepped outside the house to walk around town, I came upon a banner that said â€Å"Dalton Trumble Appreciation Day† . Wait what?There’s a holiday for my dad? It turned out he wrote a famous book called, â€Å"Alex and the Amazing Time Machine†. I stole one of the copies of the book from the future and brought it back to the past that way my father could actually write it. After that little adventure, it was time to save my brother Steven. I set the machine six weeks back in the past. After being zapped, I found myself in my bedroom again but this time I felt that there was a sense of cheeriness in the air that I hadn’t felt since Steven was taken. While I was on my way to the camp, I had to make sure that I wasn’ t seen.The one place I could hide in was the trunk of my dad’s car. I hid there because this was the same day my family went to the camp retreat, which is where Steven was taken. It was such an uncomfortable ride being squished in the trunk. When the car stopped, I snuck out of the trunk when my family wasn’t looking and grabbed a sleeping bag before closing it quietly. I went to a shed to collect some supplies that might come in handy to camp out in the woods to collect some strength and rest for what might be a dangerous mission. The next morning, I caught my fish for breakfast and was ready to save my brother.My plan however didn’t really work out. I saw Steven had already been taken by Carl and was on my way to get him until Little Davy captured me. We were both put into the van and were asked a bunch of questions. Steven sat quietly but was clearly scared because he had no idea of what was going on. I ended up answering all of the questions but not entirely truthfully. Unfortunately, they could tell when I was lying and it looked like they were prepared for it too because each time that I lied, they forced me to eat a forkful of worms that they had collected.By the time I answered all of the questions, I had eaten almost half of the plate of worms. YUCK! Next thing I knew, Carl had me and Steven tied up to trees and he had a gun that shot people into a universe similar to ours except the universe he was going to shoot us to had no way of escaping. All of a sudden, Todd showed up with a metal baseball bat in hand. You could only imagine the shock I had when I saw him. Not to mention the relief! Todd went straight for Carl and knocked his knees out. At that exact moment the gun was fired and hit a set of leaves.After Carl was on the ground moaning, Todd went straight to Little Davy and hit him in the knees as well. Once he was on the ground moaning like a baby, Todd ran to us untied us from the tree. We quickly tied up Carl and Little D avy and I used my time machine to open a portal to the beginning of time and sent them there. I closed the portal immediately so there would be no escape. I looked at Steven and explained that I had enough love for the both of us. I told him this because he always felt unloved. He was really happy to hear this and I received a great, big hug from my brother, which was really nice.Afterwards, I told him to come up with a silly story to explain to our parents as to why he was missing. When he left, I thanked Todd for coming back and being there to help rescue my brother and me. It turned out that Todd found my time machine that I had left in the present in my room when I left to go to the past. A few weeks later, Todd went missing and I thought it was happening all over again! Next thing I knew, he materialized himself in my bedroom holding a dog. Guess who that dog was. Yep! It was Scout! I gave them both a really big hug and thanked Todd for rescuing my dog.

Improving roads Essay

If someone goes on a hill or a high place and has a look at what is going on, down on the vast area, he will see a lot of curved lines that are like snakes, creeping in each other and there are some tiny objects that are moving like thousands of insects. Living in modern cities needs more traveling during the day because people go to different work places. This is a good reason for having a liable transportation system that is able to transfer every body from one place to another one. Some people think that governments should pay attention to this matter and spend more money to build more roads and highways. They prefer fast cars and a good route to ride their vehicles because they have to work or shop and there is not enough time for all of them. I believe, governments should have a general view about transportation and it means that there are some other issues that must be considered at the same time. If we spend more money on public transportation system, a lot of people can use it and they don’t have to buy a car to pollute the environment and also we would not have so many car accidents that suffer a lot of families and are a waste of money, and time. These days, every one is aware of air pollution and a great deal of damage to the environment that are caused by fuels. If the number of private vehicles increases, we can not breathe well. There are different diseases in children who live in polluted cities. Nature is changing and some areas in the world have had â€Å"acid rain† that destroyed a lot of trees in forests. Have you thought what would happen to our planet if this situation continues We must improve public transportation system and make people use it and refuse riding private cars to help ourselves. When we read a newspaper or listen to the news on radio or at T.V., we notice how many car crashes happen in a day. A lot of people die or are damaged. Families are sad and every body thinks why all these should happen. If we encourage people to take public transportation, they would be safer and the amount of psychological and economical effect on the society would decrease. As a result, I think government should spend and even invest more money on public transportation to prevent more pollution in cities and let people  live in healthy condition. Also by improving public transportation we avoid more accidents and consequently decrease death toll.

Prison System Who Is Right - 2263 Words

Lakeisha Clayborne Professor Alexander Tolj ENG Comp 111 22 April 2016 Prison System: Who is Right? The Encyclopà ¦dia Britannica defines prison as an institution for the confinement of persons whom have been remanded into custody by a judicial authority, or who have been deprived of their liberty following conviction for a crime. There are several accepted reasons for the use of imprisonment, with the individual reasons able to include one or several of them: †¢ One approach aims to deter those who would otherwise commit crimes (general deterrence) and to make it less likely that those who serve a prison sentence will commit crimes after their release (individual deterrence). †¢ A second approach focuses on issuing punishment to, or obtaining retribution from, those who have committed serious crimes. †¢ A third approach encourages the personal reform of those who are sent to prison. †¢ Lastly, in some cases it is necessary to protect the public from those who commit crimes—particularly from those who do so persistently (Coyle). The modern prison system was established first in Europe, late in the eighteenth century. The concept of the prison as a penitentiary, a place of punishment and personal reform, was advocated in this period by the English jurist and philosopher Jeremy Bentham, among others (Coyle). 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