Another great example of government's attempt to intervene in the market. Home Secretary Jacqui Smith encourages police to make public the identities of convicted offenders in local newspaper.
The tactics is designed to use the threat of public humiliation to deter men from using prostitutes. [Daily Mail 19/11/2008]
Many of you know, that prostitution is recognised as a demerit good. Will this intervention reduce market failure, thus improve social welfare? Comment below please.
For BBC article "Police plan kerb-crawling crackdown" click here.
The two main types of monopoly are the natural and the pure monopoly. The former is where one firm can produce a certain level of output at a lower total cost than any combination of multiple firms. The latter occurs when it would be inefficient to have different companies compete in order to provide the same good/service, for example the national grid.
As monopolists are assumed to be profit maximizing they produce at an output level where MC=MR. Due to lack of competition the price is usually set higher than it would be in a perfectly competitive market, thus reducing consumer surplus.
In terms of static efficiency, monopolies do not produce at an allocatively efficient, resulting in a loss of welfare, or a productively efficient output level, as resources are underutilized and they produce below the MC=AR level. As monopolies have entry/exit barriers to protect them and gains abnormal profits, it does not have to behave efficiently or minimize costs. Yet, this sometimes does occur, most notably in the Thames Water Utilised Industries where drastic job cuts of up to 25% have been suggested.
However, Schumberg argues that dynamic efficiency brought about by monopolies would be more important. It is in the interest of monopolies to spend money, derived from the abnormal profits they earn, on Research & Development as it can take advantage from spin-offs, brand image etc. without any other companies benefiting due to the high exit/entry barriers and high sunk costs, such as advertising.
Conversely, a monopoly does not necessarily consist of one firm, as a number of firms may collude together or form a cartel, usually practicing price fixing. The threat of these mega-mergers has been scrutinized closely by the Competition Commission and the World Trade Organisation.
“The increasing number and size of cross-border mergers raises concerns about whether national competition authorities can maintain competitive markets.” – WTO
WTO Against Globalisation - for more details click here.
X-inefficiency is another issue, as it tends to increase average costs increasing inefficiency. X-inefficiency is usually caused by overinvestment and lack of motivation due to lack of competition. Its effects may also be more severe depending on its scale, and may range from bankruptcy to banking system failures.
Exam Questions
ECN5 - Jan/2008 In the summer of 2006, several UK water companies imposed hosepipe bans which restricted the amount of water that households could consume.
(a) Explain the costs and benefits that might result from new infrastructure projects, such as the building of new reservoirs in areas suffering from water shortages. (20 marks)
(b) Evaluate the view that shortages in markets, such as those for water and health care, can best be prevented by the operation of market forces rather than by government intervention in markets. (30 marks)
Make sure that you understand the diagrams above and are able to draw them. By drawing a diagram correcly in your response, you may only get up to 6 marks per diagram; however, it can just form the framework your argument, thus setting you up to score the maximum marks available.
Get in touch if you don't recognise nor understand these diagrams.
A graphical device for illustrating the extent of inequality in a society.
The curve plots the percentage of a nation’s income which is enjoyed by the poorest ‘x’ per cent of the nation’s population.
Values of ‘x’ are between 0 and 100.
For example the poorest 10% of the nation’s population enjoyed only 1% of its income. To show this we would plot 10 on the horizontal axis and 1 on the vertical axis.
If the poorest 15% of the nation’s population enjoyed 1.7% of its income, we would plot a point showing this. The poorest 15% of the population include the poorest 10%, the further we go to the right on the horizontal axis, the more of the population is included.
The horizontal axis is labelled as cumulative percentage of the population.
The vertical axis is labelled as cumulative percentage of income.
The closer the Lorenz curve is to the diagonal line of equity, the more evenly distributed the nation’s income is. If the Lorenz curve is further away from the line of equity the nation’s income is more unevenly distributed.
The UK’s progressive tax system acts to redistribute income to reduce the level of inequality.
From the Lorenz curve the gini coefficient can be defined as the area between the diagonal and the Lorenz curve divided by the total area under the diagonal.
Gini coefficient =Section A
Section A + Section B
Explaining the change in equality
Changing labour market participation
Decrease in male participation mainly in households where there are no other workers.
Increased female participation among those with working partner lead to increased polarisation between two-earner and zero-earner households.
Increasing skills premium
Skill-biased technical change
International trade and the Stolper-Samuelson theorem
Institutional factors
Decline in role of trade unions
Wages policies and Wages Councils abolished
Equal pay act
National Minimum Wage
Exam Questions
Evaluate the view that the most effective way to reduce poverty is to redistribute both income and wealth from the rich to the poor.
Using economic theory, explain the causes of the unequal distribution of income in UK.
Another great example of government's attempt to intervene in the market. Home Secretary Jacqui Smith encourages police to make public the identities of convicted offenders in local newspaper.
