Homework

Market Power

Market failure is the situation defined by the inefficient distribution of goods and services in the free market

A market that is competitive is characterised by
- A relatively large number of firms
- Firms not having Market Power
- Firms not differentiating their products
- No barriers to entry - no licences, blocking of resources, etc.
However, when these conditions are not met, then the market is considered imperfectly competitive market.
- Synergy, Australia Post

A firm has market power if it can affect the market price by varying its output.
Monopoly and oligopoly firms have lots of market power
Firms with market power will attempt to maximize profit
- In doing so, their priorities may not align with society's, and thus a socially optimal level of output may not be produced

A competitive market (with firms not having market power) will produce where demand equals supply
- At the equilibrium, we know $TS$ is maximized, so the market is as efficient as possible
In the case of market power, quantity will not be at this equilibrium, and thus a deadweight loss is created
- This means that market efficiency is reduced if firms have market power

The ACCC Act (adminstered by the ACCC itself) is a piece of legislation that decreases market power
- It protects, strengthens and supplements the way competition works in Australian markets and industries
This leads to the illegality of certain behaviours
- Cartels
- Misuse of market power
- Exclusive Dealing
- Resale price maintenance
- Predatory pricing
- Collective boycotts
- Mergers or Acquisitions
In response, the policy options are
- Expand the number or types of businesses
- Expand the ability of businesses to compete
- Increase the incentive for businesses to compete
- Expand the choices and information available to consumers

The market reflects the buying and selling intentions of consumers and producers
There are cases when the production and consumption of a good can create external costs or benefits
- These are externalities
- Externalities can be positive or negative depending on whether they are benefits or costs

Driving cars causing pollution, cigarettes and health, etc.
When economic actions from either production or consumption create an external cost, it is referred to as a negative externality
- For products with negative externalities, the market quantity will always be greater than the optimal quantity and will cause the market price to be less than the optimal price
Also, a DWL is created.
- The market also overproduces. It is very inefficient
**Social cost is equal to private costs plus external costs

Consider health clubs and gyms
- They improve health, give back to the producer, and in improving health, improve the efficiency of the worker and thus stimulate the economy
- Some of the benefits of the producer have 'spilled' over to a third party - this is a positive externality
A DWL is still created because the market underproduces, it is still inefficient
Social benefit is equal to private benefits plus external benefits

As seen above, when externalities exist, the market outcome is guaranteed to be inefficient
This can be alleviated by taxes and subsidies
- A negative externality will overproduce as we have discussed; to counter this, the government can impose a tax that will shift the supply curve left
- A positive externality will underproduce; to counter this, the government can impose a subsidy that will shift the supply curve right

Two types
- Rival - does the consumption by one party reduce the supply available for another
- Excludable - is it possible to exclude a non-payer from the good or service
There are Private Goods, Club Goods, Common Property Resources and Public Goods

Goods that are produced that have large external benefits for society
- Goods that will be underprovided in the economy if the product is left in the market

Goods that are produced that have large external costs for society
- Goods that will be overprovided if left in the market
Are private goods as they are both rivary and exclusive

Non-rival and Non-excludable
- E.g. national parks, lighthouses, national defence

Public goods cause the free rider effect
Free riders enjoy the benefits of the consumption of a resource without paying for the cost of provision
This can lead to over-consumption and rapid damage of a public resource

Common Property Resources lead to tragedy of commons
Refers to the over-consumption of common property resources, e.g. over-fishing
Occurs as the resource is readily available and there are no restrictions on consumption
However, once consumed the resource is not availble to any other party, leading to depletion of the resource.

Common Property Goods: Enforce restrictions on consumption - e.g. fishing limits, no-fishing xones, fishing licenses, etc.
Public Goods: Create ownership of the resource, e.g. fees for public transport, fines for damaging public property