ECON 1123 1st Edition Lecture 24 Outline of Last Lecture I Game Theory A Prisoner s Dilemma B Nash Equilibrium II Summary of Market Structures A Pure Competition B Monopolistic Competition C Oligopoly D Pure Monopoly Outline of Current Lecture I Monopolistic Competition A Short Run B Long Run II Oligopoly A Price Leadership Dominant firm competitive fringe model B Game theory III Pure Monopoly Incurring a loss IV Tax Incidence and subsidy Analysis V Public Goods and Public Bads externalities Current Lecture VI Monopolistic Competition C Short Run in monopolistic competition positive economic profits will cause new entrants to come into the market who are after those profits Firm is making a profit if the ATC curve is below the demand schedule in short run D Long Run In the long run the monopolistic competition model will always have the ATC coming tangent to demand meaning zero economic profit This is because new entrants come in when firms are making positive econ profit These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute VII Oligopoly C Price Leadership Dominant firm competitive fringe model D Game theory VIII Pure Monopoly Incurring a loss Just because a firm is a monopoly does not mean that it is always going to be profitable You still have to look at the demand versus the average total cost to make the product Clark used the example of a rubber frying pan monopoly Sure this monopoly is the only firm selling the product which is why it is a monopoly but that doesn t mean there is a demand for rubber frying pans IX Tax Incidence and subsidy Analysis Incidence Burden You can have legal incidence or economic incidence they are not necessarily related Legal who the tax laws say will pay the tax Importance if the law says sellers will pay the tax supply shifts up left If the law says buyers pay the tax demand shifts down Typically depending on the elasticity of supply and demand both buyers and sellers share in the burden of tax Note consider a per unit excise subsidy payment to the firm from the government legally granted to sellers supply schedule shifts down Who bears the tax burden depends on the elasticities Econ Burden on Buyers Econ burden on sellers price elasticity of supply price elasticity of demand Try this with extreme examples like perfectly elastic demand the sellers will take the burden or perfectly inelastic demand the buyers will take the burden This is due to the fact that if the buyers want the good so badly that they are willing to pay whatever the price is the firm can keep the price the same but wit the tax and they will see no change in the demand for their product X Public Goods and Public Bads externalities Private Goods Rival consumption excludability Rival consumption consumption by one person reduces consumption by all others Excludability Buyers must pay a market price in order to consume Public Goods Non Rivalry and Non Exclusion Implies potential for simultaneous consumption i e consumption by one does not necessarily reduce how much others can consume Difficult or costly to prevent non payers free riders from consumption once the public good is produced Example National Defense We are forced to pay for it through taxes once you get it even if you put someone in prison for not paying taxes they still are benefiting from national defense Externalities Effects of production or consumption that are not taken into account by private market participants i e these effects are external to the market External benefits Education brings better healthcare Inoculation means that even if you don t get the shot you are less likely to get the disease from someone else around you External Costs Pollution