Monopoly market structure
Student’s Name
Institution
INTRODUCTION
A monopoly is an economic market structure where there is a single seller of the product and many buyers. It is characterized by; a significant market share and a lack of competitors within the market to produce the product or service. There is also profit maximization. The product producer can charge the product at a high price and make profits since there is a lack of competition, thereby maximizing its revenue. Price determination is also another feature whereby the producer decides the cost of the good being sold. Price discrimination, in a monopoly, the producer of the product can change the price and quantity of the product or service; in an elastic market, the cost of the good is less, and the amount is high. But if the price is high, the quantity of the interest is decreased. High barrier entry in the market-this is whereby it isn’t easy for other competitors of a product to enter into the markets.
A graph showing the monopoly market structure
Since the birth of economics, monopoly has been the main problem that economics must face. One of the main issues that Adam Smith dealt with in the wealth of nations was to break the monopoly and build a sound competitive market system, which he called “a clear, simple, and natural system.”
However, economics’ view of competitive monopoly has two different aspects. On the one hand, economists and the government believe that in addition to the monopoly established by the government under the law as a privilege, a monopoly is formed in the market. Economists and legislators believe that this monopoly will inhibit competition and harm consumer welfare. Therefore, it should be regulated, thus creating a modern national legislation anti-monopoly supervision tradition. Almost all governments restrict monopoly in the market in the name of protecting competition. However, on the other hand, some economists have provided various arguments for the monopoly established by the state and even put forward many different reasons for the state monopoly. Many economists believe that economic monopoly faces opposition, and anti-monopoly government intervention should be carried out when necessary, from my point of view. I think the government should control the monopoly market. This article will prove this point of view from different types of monopoly analysis.
A graph of deadweight loss resulting from a price ceiling
In this graph, at point A, there is a balance in the market, the supply shows this, and the price is meeting.
P1 is not a choice if the price ceiling is implanted. It makes the market move to point B.
The price is at its highest at point B, allowed by the ceiling, and when demand is not met causes a shortage in supply.
If a product is produced at point D due to the prices being low from its original price is p2, and the actual quantity is Q3, the producer would be forced to exit the business.
Due to market restrictions and inefficiency, it results in deadweight loss.
Section 2
2.1 Economic theories
In economic interpretation, monopolies refer to the general term for the structure of a market which remains imperfectly competitive. Trust is divided into three types: business monopoly, natural monopoly, and state monopoly from an entrance barrier point of view.
Natural Monopoly refers to the production of one enterprise. The cost of the product in the entire industry is lower than the sum of the costs of two or more companies separately producing the product. This industry is a natural monopoly. From the definition of natural monopoly, we can see that once an industry is defined as a natural monopoly industry, monopoly is fair and accessible competition is regarded as inappropriate. But natural monopoly is not absolute. Changes in market demand and technological progress will lead to changes in the boundaries of natural monopoly industries.
State monopoly refers to market dominance by the administrative authority, leading to the trust of one or several enterprises on the market. It is primarily a regional monopoly and a monopoly on the market. In a business monopoly, an agency competent for government-industry uses regulatory controls of authority to replace competition from other sectors or companies to protect the interests of the industry or enterprise.
2.2 Deadweight loss in monopoly
A deadweight loss is a loss in the economic efficiency that results from the equilibrium of a product that is not Pareto optimal. When it is not Pareto optimal means, it is not economically efficient. Deadweight loss is the net amount of value lost because of a monopoly-induced underproduction of a product resulting in a misallocation of resources. When these products are not produced, it leads to market failure, which happens because the value of the next release to the following top line of production is less than their value in the production of the monopoly products.
These are charges imposed by the government to its citizens as a way to get revenue. One common way is through sales tax. Taxes increase the price of products; this leads to a reduction in the consumption of those products. Deadweight loss occurs when the consumers are unable to purchase goods and services. It affects both the producers and consumers where the producers get little profits and the general purchase of goods and services decreases.
Price ceilings-Price ceilings are price controls set by the government to protect the consumers’ interest from the producers who may want to raise the prices of products. Price ceilings bring a deadweight loss that affects production as producers are less motivated to produce goods and services. The supply of goods and services decreases than the demand for products. An instance of a price ceiling is rent control, whereby it is intended to keep living costs affordable for low earning residents. For example, in the United States, the high cost of living in New York is evidence that rent control is not practiced.
The agent of the government, a social contract, uses state monopoly to protect the interests of some clients while losing the interests of others. It isn’t easy to establish whether it is economic ethics or social norms because it destroys the starting point. The principles of social fairness such as fairness, in fact, fairness in the process, and fairness in opportunity. An example of deadweight loss is when a producer of flowers grows 200 roses but sells only 110. The 90 remaining will dry up and have to be disposed of. This will lead to deadweight loss.
A graph showing the deadweight loss in monopoly
Price floors are price controls set by the government that protects the producers from charging less for their goods and services. An example of deadweight loss is a minimum wage that has increased the unemployment rate.
2.2 Critical analysis
Both market monopoly and natural Monopoly are monopolies formed by not accepting market forces in a market environment. In market competition, manufacturers continue to discover consumer preferences in the market and the lowest-cost way to satisfy these preferences. Real competition must be a continuous competition process, rather than a criterion for judging competition and monopoly based on the theory of perfect competition in book analysis: competition conditions or competition structure. Therefore, the so-called monopoly phenomenon in market competition, including market power, natural monopoly, and other monopoly phenomena, has the characteristics of process competition and efficiency attributes. Therefore, as long as the market structure is formed through fair competition, even if the market is monopolistic or highly concentrated and oligopolistic, government regulation is unnecessary. The competition activities of enterprises will not destroy competition and efficiency but are the primary form and true nature of market competition (Armentano, 1990). Competition is a trial and error process. Trial and error price adjustments, advertising strategies, product differences, and various other competitive situations are an excellent way to discover the market and information and an inevitable means to discover knowledge. Even Cartesian formed by enterprises is an efficient production structure (Salin, 1996).
However, this article believes that the monopoly that society should resolutely oppose is a state monopoly—a monopoly created by the government granting a particular enterprise or certain enterprises the privilege to operate a specific product. From the perspective of the social contract forming the state, the monopoly privilege caused by administrative power violates the social contract.
2.3 Case study
It explains the loss of economic efficiency caused by the state monopoly; the article will discuss the reform of the removal of Monopoly in China’s power industry as an example. China’s power industry is facing severe monopoly problems. Monopoly has caused many negative economic impacts and greatly hindered the development of the power industry itself. The Monopoly of China’s power industry is manifested in the trust of ownership and management rights, the vertical integration of power production and supply activities, and the high concentration of power production. Before the reform, the whole people owned China’s power assets, and the State Council was its representative. Governments at all levels not only held but also had direct operational control over the power industry. The ownership and management rights of the power industry are highly concentrated in the hands of state-owned economic entities. And the four links of power production and supply activities, including power generation, transmission, distribution, and power supply, are all managed and managed in a unified manner. This kind of operation and management is vertical integration or vertical integration management. However, this kind of state monopoly will harm the economy. The trust of the power industry has led to the low efficiency of power generation companies. Since the profits of power generation units have been determined, they have the motivation to strive for more power generation to maximize profits. Still, they have no external pressure to reduce costs, carry out technological innovation and improve efficiency. Because higher electricity prices enable power plants to increase power generation and sales, they are far more than reducing costs. Improving efficiency can bring more, faster, and more direct profits. And the high degree of monopoly of power supply enables power supply companies to implement monopoly power prices, multiple power prices, and monopoly power prices due to the unit price of electricity borne by enterprises. Still, the cost of electricity delivered by urban and rural residents and industrial enterprises is also very different. This behavior seriously damages the interests of consumers. The establishment of a monopoly and high prices have seriously eroded the interests of other enterprises and industries. Since the cost of electricity prices is directly related to the cost of industrial enterprises, the high industrial electricity prices have become a heavy burden for most industrial enterprises and have weakened their market competitiveness.
Since 2002, China’s electric power has entered the reform of dismantling monopoly. The goal was to break the State Power Corporation’s vertical monopoly and bring competition (primarily on the generation side) by diversifying the generating entities, with the primary goal of lowering costs and increasing productivity. Specific measures include splitting the State Power Corporation into 11 new companies, and these 11 companies have not obtained all state-owned power generation assets. It means that they will compete fairly with other power generation companies in the market. Besides, the establishment of wholesale and retail markets and the introduction of competition mechanisms create cost control and efficiency improvement incentives.
Section 3.0 Conclusion
For economic growth and development, monopoly plays a critically important role. Trust must be present in the market economy. The government protects both the consumers and producers differently. For instance, for the producers, it ensures that the products they produce can give them their returns by setting price controls. For consumers, the government can protect consumers from exploiting goods and services provided by product firms. Deadweight loss results from monopoly as there is underproduction of goods and services since the firm has no competitors. A trust can only become better if the barriers that hinder the entry of other competitors are lessened.
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