the percentage of the market s total output supplied by its four largest difficult than private goods many firms CHAPTER 16 MONOLISTIC COMPETITION Perfect competition identical products similar but not identical products Monopoly Monopolistic competition many firms one firm Many sellers product differentiation free entry and Long run economic profits zero Demand curve facing firm downward sloping sell exit To maximize profit produce Q where MR MC D curve used to set P Monopolistic competition is less efficient than perfect competition Excess capacity monopolistic competition operates on the downward sloping part of its ATC curve produces less than the cost minimizing output under perfect competition firms produce the Q that minimizes ATC TC Q Markup over marginal cost socially efficient Q under perfect comp P MC under monopolistic competition P MC market Q is below the Short run Product variety externality surplus consumers get from the introduction of new products Business stealing externality losses incurred by existing firms when new firms enter market in general the more differentiated the products the more advertising they buy economist also disagree on the use of brand names as signs of quality under mono comp firm behavior is very similar to monopoly entry exit drive economic profit to zero under mono comp Long run Profits in short run firms enter market prices profits fall Short run Losses in short run firms exit market remaining firms enjoy higher demand prices Entry exit occur until P ATC and profit 0 CHAPTER 17 OLIGOPOLY Concentration ratio firms The higher the concentration ratio the less competition Oligopoly a market structure in which only a few sellers offer similar or identical products Duopoly Has high concentration ratio A firms decision about P or Q can affect other firms cause them to react Game Theory Duopoly Collusion the study of how people behave in strategic situations about quantities to produce or prices to charge a group of firms acting in unison oligopoly with 2 firms an agreement among firms in a market Cartel Both firms would be better off if both stick to the cartel agreement but each firm has incentive to renege on the agreement Nash Equilibrium each choose their best strategy given the strategies that all others have chosen a situation in which economic participants interacting with one another Increasing output has 2 effects on firms profit if P MC increasing output raises profit 1 Output effect 2 Price effect all unites sold raising output increases market quantity which reduces price profits on Size of a oligopoly as the of firms in a market increases The price effect becomes smaller The oligopoly looks more like a comp market P approaches MC The market quantity approaches the socially efficient quantity Trade goes up the of firms competing increases Q brings P closer to MC Dominant Strategy strategy that s best for a player in a game regardless of the other strategies chosen by the other players cooperation is difficult even when it s mutually beneficial Prisoners dilemma a game between two captured criminals that illustrates why When oligopolies form a cartel to try to reach the monopoly outcome they become like Non cooperative oligopoly equilibrium the prisoners achieving monopoly profits good for society Q is closer to the socially efficient out P is closer to MC bad for oligopoly firms prevents them from Tit for tat whatever your rival does in one round whether renege or cooperate you do it in the next round Role for policymakers promote competition prevent cooperation to move the oligopoly outcome closer to the efficient outcome Sherman antitrust act forbids collusion Clayton antitrust act strengthens individual s rights CHAPTER 10 EXTERNALITIES Externalities being of a bystander can be negative or positive The uncompensated impact of one person s actions on the well Public policy can improve efficiency in these situations Welfare economics supply cure shows private cost demand curve shows private value Social cost private external cost v s Social value private value eternal benefit External cost value of the negative impact on by standards Internalizing the externality altering incentives so that people take account of the external effects of their actions social optimum When market participants must pay social costs market eq m If a negative externality market Q socially desirable If positive externality market Q socially desirable Remedy int the ext tax goods with negative externalities subsidize goods with positive ones Public policies toward externalities 1 Command Control regulate behavior directly 2 Market based provide incentives that private decision makers will choose to solve the problem themselves so Corrective tax designed to induce private decision makers to take account of the social costs that arise from a negative externality aka pigouvian tax corrective taxes are better for the environment Pollution efficient outcome firms with low abatement costs reduce pollution the most Regulation is not efficient Taxes create incentive to be cleaner Firms with low abatement cots rise WTP taxes Gas Tax pollution corrective tax addressing 3 negative externalities congestion accidents and Tractable Pollution Permits A firms demand for ability to pollute downward sloping function of the price of polluting CHAPTER 11 PUBLIC GOODS COMMON RESOURCES A good is excludable if a person cant be prevented from using it A good is rival consumption if one persons use of it diminishes another s uses Free rider Cost benefit analysis Important public goods study that compares the costs benefits of providing a public good national defense knowledge created through basic research person who receives the benefit of a good but avoids paying for it system reduces pollutions at lower cost than regulation fighting poverty Cost benefit analyses are imprecise so the efficient provision of public goods is more It is the role of gov t to see that common resources are provided Tragedy of the commons a parable that illustrates why common resources get used more than is socially desirable tragedy due to externality private incentives outweigh social incentives people neglect the external cost Polices to prevent overconsumption regulate use corrective tax to internalize the externality excludable rival in consumption ex food not excludable not rival ex national defense Private Goods Public Goods Common Resources Club Goods Public goods problem Free Rider Gov t