Oligopoly - Monopolistic CompetitionEconomics

Question: (a) Identify the key characteristic of four market structures (ie. monopoly, oligopoly, perfect competition or monopolistic competition). Give a case study example of each market structure. (b) Explain what negative externalities are, and why there may be a case for government intervention to address them. Describe some of the ways to correct the negative externalities and the pros and cons of each method. Provide real life examples. (c) Choose a case study from your home country (CHINA) where an externality exists in a current market. Illustrate the situation with externalities in your case study and the resulting deadweight loss in a diagram and discuss ways that your government has addressed the presence of negative externalities in the market. Answer: There are four kinds of market named monopoly, oligopoly, perfect competition and monopolistic competition. All the different kinds of markets are discussed below one by one. Monopoly Market Monopoly market can be defined as the scenario when there is a single seller present in the market for a particular product and the seller does not have any competition at all. The buyers have no option but to purchase the commodity or services in the time of need from the single seller available. In this scenario the seller may enjoy the benefit of being sole supplier and may play with the price of the commodity on their own sweet will. (Monopoly, 2015) The different characteristics of the monopoly market are: Maximizing profit may be the sole motive of the seller since they are the only one present in the market. Price discrimination is often seen in the monopoly market as the market is dominated by the seller and thus they charge the prices of the product as per the nature and behaviour of the market either being elastic or inelastic. In the monopoly market the single seller is the price maker of the product. They may also vary with the quality and price of the product as per their needs of maximising returns and reducing cost. The market is dominated by the single seller to such an extent that it becomes more than difficult for the new entrants to enter the market and break the monopoly. Since the whole market is single company dominance therefore that particular company can only be called as the whole industry of such product. (Monopolies) The real life example of monopoly market in China is the state- owned oil companies which supplies crude oil to the private oil companies there. In the above diagram PABC is the area which denotes the super normal profits. In general, the profitability measure is defined by the competition level but since this is a monopoly market so there is no competition and thus revenue is higher than cost even before the event of MR = MC. (Daiss, 2013) Oligopoly Market This kind of market has no much difference when compared to the monopoly market. This market is also dominated but unlike monopoly market in this scenario the market is dominated not by a single seller but by few sellers countable in number. These few sellers generally form different collusions so as to control the price and supply of the particular product they sell. (Oligopoly) The characteristics of such market are that same as monopolists maximizing profits are the motive of the oligopolists too. They are the price setters and the entries to the new entrants being small businesses are quite difficult. Since the sellers are few number and are very large organizations thus their interdependencies of activities and its effect on all the sellers. (Oligopoly, 2014) Examples of the oligopoly market are few operators in mobile company in India named BSNL, Airtel, Idea, Reliance, etc. Also few major airline companies may also be considered to be in the oligopoly market. In the airline services the limited number of companies generally creates collusions among them and fixes the prices of the services. This practice of the airline service is known as creating a cartel. Cartels are the practice of deciding the prices amongst them by the sellers so as to keep hold on the market and create barriers for the new entrants. (Real life examples) Perfect Competition In general the perfect competition market is also known as the pure competition. Here there are large number of buyers and large number of sellers competing on a similar platform. The seller here is the price taker as the price here is determined by the demand supply equilibrium curve. In the below mentioned graph, P is the price determined for the quantity Q. The meeting point of the marginal revenue curve and marginal cost curve is the point where the firm is earning normal profit. In this kind of market the firm only earns normal profit due to enough transparency and good number of new entrants. (Perfect Competition) Some characteristics of this kind of market are: No barrier to the new entrants as well as to the quitters. Buyer as well as seller is well informed about the market trends. The products are homogenous in nature and are perfect substitute for each other. Innumerable numbers of sellers as well as buyers are present in the market competing and making it a perfect marketing competition. Absence of externalities as the cost or benefits of any activity does not affect the third party. (Perfect Competition, 2014) One of the very old examples of the perfectly competitive market is the Fish Market. There are large numbers of fishmongers catching fish and selling them in their local market. They are the price takers and need to follow the price trend of the market in order to survive. The fish products are highly perishable and cannot be stored and sold for much longer period of time. Due to this perish ability of the product the need to be sold as soon as possible, this nature of the product allowing the market to be high competitive and ready market for the local vendors. Local vendors are the price takers and are not able to demand price from the buyer on their own sweet will. The price of such product is decided by the equilibrium point of the demand and supply, following the demand and supply theorem. (Yih, 2013) Monopolistic Competition Monopolistic Competition is the impure competition market where the seller does not have the control on the impact on its own prices. There are large numbers of sellers selling differentiated products which are though not homogenous but are competing for the same customers. The products are not the perfect substitutes of each other but are definitely a close one. In this type of market in short run super normal profit may be possible but in long run it does not happen as there is free and easy entry for the new entrants and a good opportunity to differentiate with the help of sound knowledge. Here the below mentioned graph is same as diagram 1 above, it is shown the super normal profit earned depicted by the area PABC which is possible only in short run period. The characteristics of this market are that there is no barrier for the new entrants. The products are differentiated on different bases such as physical product differentiation, where the products are differentiated on the basis of their physical appearance. Marketing differentiation, where the strategies are different for different product in the market. Human capital differentiation, this is basically related to the staffs and employees and differentiation through distribution, where different means and channels are selected to market the product. The sole motive of the firms under this market are maximizing their profits as generally these are small firms with controlling manager giving his heart to achieve its goal. The examples of the monopolistic competition market are hotel, pubs and restaurant business or consumer services such as beauty parlours etc. The products like shampoo, soap and other utility products are also examples of monopolistic competition market because of the slightest differentiation among all such products of different firms. (Monopolistic Competition) Answer: Externalities are the impact on the third party as a result of production and consumption. There are two types of externalities negative and positive. Positive externalities are the impact which is beneficial to the third party. The practice of bee-keeping besides agro farm enables the farm to bloom as well as feeds the necessities of the bee-keeping. The third party does not pay for the same but receives the advantages and benefits. However, the negative externalities are the impact on the third party due to production and consumption pattern. In production pattern the pollutants evolved in the process of production polluting the environment is affecting the society whereas in the consumption pattern the hazardous impact on the society due to certain consumption of the individuals are externalities here. Smokers polluting the environment in a public place say a movie theatre where smoking is not banned, the theatre authority is indirectly spoiling the fun of the non-smokers and are not even compensating for the same. (Riley, 2012) There are two types of negative externality, one is the negative production externality and the second is the negative consumption externality as described above. Production externality can also be correlated with the smoke emit tents for the factory chimney polluting the environment creating air pollution, also with the waste effluents discharged in the water affecting the water bodies hazardously and the fishermen business creating water pollution as well. However, in this type of externality the third party which are affected been compensated generally. Negative externalities can be illustrated as below: Air pollution which created by the chimneys of the factories. Also burning the public resources of fossils fuels and hampering the agro crops are the air pollution and negative externalities. Noise pollution created during the production process from the heavy machineries disallowing the neighbourhood to live in peace is also considered to be the negative externality. Water pollution from the waste disposals in the production process are the considered the same. Polluting water bodies are serious health hazard for the living being and society as we all know how much water is for us. The compensation is also paid to the fishermen when the dam built affects their means of livelihood. Also the small fishermen are compensated when the large vendor strains out all the fishes in the sea and leaving none for the smaller vendors resulting in overfishing. These are all the examples of negative externalities. The methods of dealing with these are mentioned below: Taxing the activities It has been rightly said that humans prevent themselves from doing something if they are supposed to compensate for doing so. Taxing is one of the methods which will make the party think rationally and economically before doing such activity. If the producers are taxed for the amount of effluents discharged or the hazardous by products evolved from the main production process, then they will definitely put a check on such evolution and will try to curb it. In contrary it may also happen that the burden of such tax is shifted to the consumers of the main product resulting in higher cost to the ultimate consumers. However, government may put some restrictions on such policies by intervening into the matter. This method can be successfully implied for the product which has a perfectly competitive market where the price rise may reduce the demand of the product. Environment Protection Rules and Regulations There may be introduced certain agencies which will make and check the policies in protection of the environment. These are for the welfare of the society as well as the environment. These agencies will be under the surveillance of the government. This particular method may not be fruitful for the government companies destroying the harmony of the environment as the government has the control over both agency and company thus chances of red tapism. Internalization of the cost The cost of compensation is internalized so as to incorporate it into the cost of production and sales. This method will encourage the firms to make best allocation of resources and make optimum utilisation of such resources so as to minimize the cost. This method may not be successful for the firms which are unable to reduce their cost due to their inefficiencies and thus resulting higher cost of the product to the consumers. (Externality, 2014) These negative externalities are basically dealt with the base ground of ethics. Ethically the governance of the firm should be positive and bend towards the welfare of the society as a whole instead of just maximising its returns. In the below given diagram Q is the quantity produced which is beneficial to the society but if the firm producing quantity Q* then the gray patch showing the deadweight welfare loss (DWL) to the society is suffered. (Negative Externality) By dealing with the stock and fund pollutants society can gain as a whole. The production pattern and the consumption pattern of the society play a very prominent role in the society welfare thus we need to behave sustainably, rationally and ethically to achieve our goal. Government intervention is crucial because studying the behavioural pattern of mankind, they will only do the needful when they are forced to do or the same is their requirement. To conclude, the society as a whole will have to put their best foot forward in this aspect to save our environment and avoid such negative externalities. Answer: In China, the most popular thing about it is its rapid growth and its economy. But the cost of this economy and growth is such higher that not only the china but the world as a whole will to pay for it. The china has been growing not only in the industrialization but also in its agricultural sector feeding 22% of the world masses. There has been lot many externalities which have resulted from this rapid growth. This externality is its pollution rate which is adversely affecting not only the China countrymen but the whole worlds population. The rate of air pollutants emitted from the factory chimneys has become the major constraint for the health issue of Chinese government. The loud sound produced by the heavy machineries in the factories has killed the environmental peace of the whole environment. It has also been addressed that the amount of harmful wastes and effluents secreted by the agricultural land is much more when compared to that of effluents generated from the factories in the production process. It has been acknowledged that the amount of insecticides, pesticides and the chemical fertilisers used in the agricultural process is the main reason for such harmful effluents. (Lucchesi) In a case study it can be seen that the Industrialist X is involved in the production process which is emitting sulphur dioxide gases as its waste from its big chimneys. Sulphur is very hazardous for the living being on the planet. Its accumulation leads to the acid rain which destroys the crops, heritage as well as is unhealthy for the beings. X is at its growth period and due to the grant of subsidy from the government day by day it is increasing its production quantum which is also resulting in the increase in the harmful gases. In the sector just like X other industrialist also at a growing pace are increasing their supply. As a result deadweight loss has occurred. Dead weight loss can be defined as the loss to the society due to inefficiencies created by the market. It can be allocative inefficiencies or the restrictive trade-offs. Externalities are also one of the reasons for the dead weight losses. In the below mentioned diagram the shaded portion is the dead weight losses resulting due to the externality of heavy pollution emission from the Xs factories. S1 is the Supply curve before the grant of subsidy, whereas the S2 is the supply curve after the subsidy. Increased supply with same amount of demand has although increased the quantity but at the same time with the effect of the demand supply relationship reduced the price of the product. The increasing sulphur dioxide in the environment is a matter of concern for the government. It was the biggest challenge for the government to deal with the situation but at the same time not to affect the quantum of production in the sector. So as to address the issue tactfully government has issued a policy of emission credits. Every firm are issued the measure of emission credits up to which they can emit such gases and will be penalised heavily if the limit exceeds. These credits were made transferable so that if due to some reason the emission is less for X then it can sell such credits to the other firm which can raise its limit of emission by such quantum. In this way the quantum of pollutant in the environment will be limited to the amount of credits mentioned in such transcripts. At the same time by this method the production quantum of the sector will also not be reduced. (Micro: Externalities- Air Pollution and Life Expectancy in China) The issue of such negative externalities are very harmfully impacting the mankind. Numerous premature deaths are occurring due to the inhaling of such poisonous gases as well as intake of hard chemically fertilised food crops. Not only the air but the water is too polluted causing too many deaths. The brown clouds of sulphur accumulating over the seas will lead to acid rain in the ocean which will not only contaminate the water but will also destroy the water bodies and habitants inside the oceans. The people in China were dying due to the many dangerous diseases such as diarrhoea, bladder and stomach cancer all because of the polluted water intakes and polluted air surrounding us. It has become need of the hour for the government to look in to the matter seriously and take proper steps. References Daiss, T. (2013, July 4). China state owned oil monopoly system to slowly change. Retrieved January 6, 2015, from https://www.energytribune.com/77959/china-state-owned-oil-monopoly-system-to-slowly-change#sthash.62i9K5yj.dpbs. Externality. (2014, december 26). Retrieved January 06, 2015, from https://en.wikipedia.org/wiki/Externality. Lucchesi, M. (n.d.). China: Growth and Consequences Growth and Externalities in China. Retrieved 2015, from https://www.ncuscr.org/files/Lucchesi_Curriculum_Project.pdf. Micro: Externalities- Air Pollution and Life Expectancy in China. (n.d.). Retrieved 2015, from https://www.tutor2u.net/blog/index.php/economics/comments/unit-1-micro-externalities-air-pollution-and-life-expectancy-in-china. Monopolies. (n.d.). Retrieved January 6, 2015, from https://www.economicsonline.co.uk/Business_economics/Monopoly.html. Monopolistic Competition. (n.d.). Retrieved 2015, from https://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html. Monopoly. (2015, January 5). Retrieved 2015, from https://en.wikipedia.org/wiki/Monopoly. Negative Externality. (n.d.). Retrieved 2015, from https://economics.fundamentalfinance.com/negative-externality.php. Oligopoly. (n.d.). Retrieved 2015, from https://www.investopedia.com/terms/o/oligopoly.asp. Oligopoly. (2014, December 23). Retrieved 2015, from https://en.wikipedia.org/wiki/Oligopoly. Perfect Competition. (n.d.). Retrieved 2015, from https://www.investopedia.com/terms/p/perfectcompetition.asp. Perfect Competition. (2014, December 18). Retrieved 2015, from https://en.wikipedia.org/wiki/Perfect_competition. Real life examples. (n.d.). Retrieved 2015, from https://www.enotes.com/homework-help/give-real-life-examples-monopoly-perfect-111737. Riley, G. (2012, september 23). Negative Externalities. Retrieved 2015, from https://tutor2u.net/economics/revision-notes/as-marketfailure-negative-externalities.html. Yih, C. C. (2013, July 1). The Fresh Fish Market - A Perfect Competition. Retrieved 2015, from https://economicsmalaysia.blogspot.in/2013/07/the-fresh-fish-market-perfect.html.