Government Intervention in Market

The Market Structures The complete economic activities ar progress toled in quaternary contrasting foodstuffplace structures, namely arrant(a) contender, monopolistic rivalry, oligopoly and monopoly. The nature and compass point of competition varies among the all the above-mentioned four marts. In summarized manner we tail assembly describe that as the number of vendors growths, each trustworthys ability to charge utmost hurts reduces.If number of buyers increases then buyers practice to purchase the right(a)s at his choice value diminishes. The sellers have to face harm competitions if the convergence is homogeneous and legal injury and non- terms competition exist if heavys atomic number 18 differentiable. A large number of buyers and sellers make competition gross(a). A homogeneous good with a number of sellers put the commercialize in competition except a homogeneous good in a few sellers and a number of buyers escapes the competition in other(prenom inal) directions and put sellers in relatively good position.The complete knowledge of buyers and sellers regarding market price and goods encourage fair competition on the other hand incomplete knowledge of product, alluring misleading advertisements and forced differentiation of the goods good fortune the pure competition. Production of a good by a fact take a leakr or a few producers put the economy in their hands (monopoly) but if only a few buyers or a union of the buyers is controlling (monopsony) the market then market becomes non-competitive.All of the above thither ar some peculiar goods, which are non-excludable ( groundwork be consumed by any(prenominal) one without paying the personify) and non-rivalrous (no one has exclusive right all all over its exercise), that are non produced by any return making companies such as military assist to protect the nation. Market Failure Causes From the above word it is very easy that except improve competition rest tri o market structures are not fulfilling the best criteria of economy i. e. high over all economic growth, full employment and fair distribution of income among the different parts of the ball club.The reasons for such market failure or non-attainment of the Pareto optimality (efficiency in transfigure/consumption, efficiency in production and overall Pareto efficiency) are as follows 1. imperfect tense Market Whenever the market is imperfect as under monopoly, monopolistic competition or oligopoly, the perfect market will fail to light upon the Pareto optimal motives. 2. Externalities If the prices in a market do not reflect the veritable bare(a) bes and/or fringy benefits associated with the goods and gains traded in the market then there must be present of some externality.If the productivity of an individual affects the benefits of the others is called the production externalities and if the consumption levels of others affect the welfare of the individuals then consu mption externalities occur. 3. Public GoodsBecause popular goods are non-excludable and non-rivalrous, they are not sold in a free market like private goods. on that pointfore, they cannot be provided by private firms. 4. Increasing extends to scale in that respect are increase return to scale or decreasing speak tos due to technical externalities that lead to market failure under perfect competition.When there are increasing returns to scale in a perfect competitive market, they lead both to monopoly or to losses. 5. Asymmetric or Incomplete informationIn the accredited world, there is asymmetric or incomplete information due to ignorance and doubt on the part of buyers and sellers of goods. Thus they are unable to equate well-disposed and private benefits and greets. Type of giving medication Intervention At this stage Government hitch comes into effect and Government try to provide the following benefits 1. mark moody non-competitive fashion of the firms. a. Taxatio n of monopoly profits (the Windfall Tax) . Regulation of oligopolies/cartel style c. Policies to introduce competition into markets (de-regulation) 2. Using Tax or subsidies or by environmental policies combat externalities. 3. Provide public goods. a. Direct provision of public goods (military services) b. Price controls for the recently privatized utilities 4. Provide information and assure information ladder by various law and policies. 5. Government changes the income distribution by society by imposing income tax and inheritance taxes etc. Why edible corn whiskey/ soybean or wheat like agricultural commodity market do not need political relation interventionThe agriculture commodity market for corn/wheat/soybean like commodities fulfill the conditions of perfect competitive market as a) Many small producers b) Homogeneous product c) Many buyers d) Free entry and exit e) All the producers face the same cost as they have equal regain to the same technology. In the perfect c ompetitive market a seller/producer has to simply determine how many units to produce and sell at the current sense of equilibrium price. If a utterly competitive firm assimilates con blend in economic profit, new firms enter in the long run and market supply increases hence the price decreases.As the price falls each firms economic profit diminishes. To restore the economic profit, animate firms make every effort to become more competent, but their mastery encourages further entry in the market. Due to this continuous entry in the market in the long run each firm accomplish a normal profit. If firms face the economic loss in the perfect competitive market and they are optimally efficient with current obtainable technology then this environment compels some (weaker) firms to provide the market in the long run. As some firms exit, the market supply decreases and price increases.The march continues in the long run till each surviving firms earn a normal profit. The graph b elow demonstrates the longrun equilibrium in a perfectly competitive market, where profit equals zero pic We observe that the following is the moorage for a perfectly competitive market in long-run equilibrium moolah (? ) = 0 because P = ATC. P = MR = MC = ATC. The firm is producing the amount where ATC is at its minimum point. Technological EfficiencyAt given cost of production (resources used) if the make produced is maximised then it is called technological efficiency.From the above diagram it is clear that the firm is technologically efficient as it is producing the output at the net point of its cost curve (ATC). It is natural as i) All profit maximizing firms want to increase their profit by minimizing the cost of production as in the perfect competition they cannot raise the prices of homogeneous product. ii) As in long run profit equals to zero for a perfectly competitive firm, hence, if the firm does not choose to minimise the production-cost, ATC will increase a nd profit would be less than zero.Allocative EfficiencyIt occurs when resources are allocated to the production of goods in such a manner that society is a well off as possible. Marginal societal cost (multiple sclerosis) captures the opportunity cost of employ another input in the production of a good, where opportunity cost refers to the best alternative use of an input. If more of a good is demanded in the market, additional inputs (e. g. labor, electricity, etc. ) are required to produce additional output of that good. We can measure the cost of added production by looking at the marginal cost (MC) of producing one more unit of the good.The rule to achieve allocative efficiency is that the additional benefits received by consumers from consumption of a good equal to the incremental costs of producing another unit of that good. mutual savings bank = MSC To achieve allocative efficiency in the use of productive inputs, marginal social benefit must equal marginal social cost for a good or service. If marginal social benefit is greater than marginal social cost (MSB > MSC) then the benefits attained by consumers from the consumption of another unit of the good or service exceeds the opportunity cost of the allotment of additional inputs into the production of that good.In other words, when MSB > MSC, society wants more of the good produced and uses the market to signal that desire. How does the market convey this information? Since price (P) equals marginal social benefit (MSB) and marginal cost equals marginal social cost (MSC), we have the condition that P = MSB = MSC = MC or P = MC So the Pareto optimality conditions fulfilled. Hence the agriculture commodity markets for corn/wheat/soybean like commodities need not any government intervention. Local Cable TV or local gas club need government interventionThe local cable TV or local gas company in many countries works as a monopolist. The required conditions to be a monopolist are 1. There is one sell er or producer of a homogeneous product. 2. There is no close substitution of the product available 3. There is perfect competition in the factor market so that it can minimize the cost of the production 4. There are many buyers of the product but none of them can influence the price of the product. 5. There is no terror of entry of exit. Given above assumptions, the price, output and profit under monopoly are determined by the forces of demand and supply.The monopolist has complete control over the supply of the product. He is also a price maker who can set the price to his maximum advantages. But he cannot fix the price and output simultaneously. Either he can fix the price and admit the output to be determined by the consumer demand at that price or he can fix the output to be produced and leave the price to be determined by the consumer demand for the product. Thus any(prenominal) price he fixes, whatever output he decides to produce are determined by the condition of demand. picWe observe that the following is the case for a perfectly competitive market in long-run equilibrium Profit (? ) >= 0 because P >= ATC. P >= MR = MC The firm does not produce the quantity where ATC is at its minimum point. Technological EfficiencyAlthough each firm in monopoly want to reduce its cost of production to maximize the profit yet the industry/ market does not produce the output at the minimum point of ATC so the monopoly market is technologically not efficient. Allocative EfficiencyAs we have already discussed that the condition to attain allocative efficiecy isP = MSB = MSC = MC or P = MC But as P is greater than MC in the case of monopoly so it is inefficient on allocation basis, which is called deadweight welfare loss (social cost). We whitethorn say that the monopoly leads to misallocation and underutilization of resources and simplification in consumers welfare. Government may impose regulations to control a monopoly For industries where the comely tot al cost curve displays tremendous economies of scale, the government may decide that having a single provider is desirable.Using the measures of productive and allocative efficiency, regulators know that when odd alone, a profit maximizing monopoly produces less of the good or service than is desired by society and at too high of a cost. Regulated monopolies agree to adhere to government oversight in revisal to sustain their monopoly status. 1. Forbidding the formation of monopolies (e. g. , antitrust laws) 2. Forbidding monopolistic behavior (like predatory pricing) 3. Ensuring standards of provision. 4. Ensuring competition exists (e. g. deregulation) 5. Imposition of a lump-sum tax on a monopolist (shifts AC upwards), and supernormal profits are taken as tax. Governments may also regulate MC/AC pricing for monopolies. effect of MC/AC regulating pricing by government intervention Marginal Cost price Regulators set price where marginal cost equals demand. This is the most effi cient solution as allocative efficiency is achieved P = MC and therefore MSB = MSC. But the firm is losing money, as total revenues are less than total costs (see the figure given below).In the long run, if this condition prevails, the firm will shut down and cease to operate, not especially a desirable outcome if the monopoly provides an essential good or service such as electricity or water. It is sometimes called optimal price regulation. It does not work with natural monopolies (they will not earn a profit, and would exit the industry). See the following figure. Average Total Cost Pricing For natural monopolies, the regulator can force monopolies to charge the price where ATC crosses Demand.At this price economic profit will be zero, although there will be normal bill profits. Sometimes called non-optimal price regulation. This is a more efficient outcome than no regulation at all. Price still exceeds marginal cost and therefore, marginal social benefits exceed marginal social costs. With average cost pricing, allocative and productive efficiency are not achieved. The firm earns accounting profits but no economic profits. Smaller deadweight loss than unregulated monopoly. See the diagram given below. pic