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NEGATIVE:Sold good is Aluminium. Aluminium factories emit pollution. For each unit of aluminium produced, a certain amount of pollutant enters the atmosphere and poses a health risk for those who breathe air
POSITIVE: The construction of a train station can provide shelter for the homeless when it is raining. If a company develops new technology, such as a database programme, this new technology can be implemented by other firms who will gain a similar boost to productivity.
POSITIVE CONSUMPTION EXTERNALITY: Alcohol – if people drive under the influence of alcohol.
NEGATIVE CONSUMPTION EXT: Education – if people spread their knowledge to create added value.
FURTHER PROBLEMS TRANSACT. COST: 1.Nº of parties involved: the larger the number of interested parties involved in the agreement, the more costly it becomes. 2. Asymmetric Info of rational behaviour: Difficult to negotiate and efficient outcome 3. Existence of Free Riders: not payers towards the agreement
PIGOVIAN TAXES: are taxes enacted to correct the effects of negative ext. p.e: taxes can reduce pollution at a lower cost to society.
TRADEABLE POLLUTION PERMITS: Gov. allows firms to make deals among each other with pollution permits. The firms that can reduce pollution only at a high cost will be willing to pay most for the pollution permits. The invisible hand will ensure that this new market efficiently allocates the right to pollute.
11. FIRMS IN COMPETITIVE MARKETS
RELATIONSHIP SHORT RUN SUPPLY CURVE AND FIRMS’S DECISION MAKING about whether to operate or to shut down in the short run:
12. MONOPOLY
MONOPOLY: A firm is said to be a monopoly if it is the sole seller of its product and if its product doesn’t have close substitutes. In reality if they are the dominant seller in the market and are able to exert some control over the market as a result. It’s only one seller.
MONOPOLY CAUSES TO ARISE: 1. In particular, economies of scale are so important that only one firm can produce entire output. If this particular firm is capable of producing goods at lower average cost compared to two or more firms, the market creates ‘natural monopoly’.2. Secondly, control or ownership over crucial raw materials or knowledge of a low cost production technique may allow monopoly business to stay. 3. Thirdly, patents, copyrights and trademarks allow a monopolist to produce a specified commodity. This prevents other firms from producing the good without the permission of the patent-holder or the copyright-holder.
PRICE DISCRIMINATION EXAMPLES: 1.Cinema Tickets: Many cinemas charge a lower price for children and senior citizens than for other age range. 2. Quantity discounts: “Second unit 50%”. The customer effectively pays a higher price for the first unit bought than for the last. PUBLIC POLICIES AGAINST MONOPOLY: 1. Competitive legalisation: banning pricing strategies which are anti-competitive such as price fixing, predatory pricing or price gouging. 2. Public Ownership: Gov. can run a private monopoly by itself by institutionalising it.
13. MONOPOLISTIC COMPETITION
MONOPOLISTIC COMPETITION DIFFERENCE: *Many sellers: There are many firms competing for the same group of customers. *Product differentiation: slightly difference from others products. *Reduces the degree of substitutability. *It is garnering an element of customer or brand loyalty *Each firm faces a downward sloping demand curve. *Free entry: firms can entry or exit the market without restriction. EXAMPLES: – Computer games, Restaurants, Driving schools, dentists, Music teachers, books, hotels, air conditioning systems…
ADVERTISING AS A SIGNAL OF QUALITY: The willingness of the firm to spend a large amount of money on advertising can itself be a signal to consumers about the quality of the product. Kellog’s and Nestle. Nestle knows that it cereal is only mediocre. So spending 10M€ in advertising is not worth as they only get 3M€ in sales. Nestle does not bother to advertise.
Kellog’s knows that its cereal is very good. 10M€ in advertising bring in 36M€ in sales so Kellog is advertising although the content of the advertising is actually irrelevant. Advertising is close to branding.
14. OLIGOPOLY: there are only a few sellers in the market (Duopoly: 2 sellers), where each offering a product similar or identical to others (p.e. Chocolate Bars and Crude Oil markets) CONCENTRATION RATIO:It is said to be concentrated when a market is dominated by a relative small number of sellers. The concentration ratio refers to the proportion of the total market share accounted for by the top x number of firms in the industry. Example: a five-firm concentration ratio of 80% means that five firms account for 80% of the market share. Examples industries: Brewing, Banking, Oil industries, Supermarkets… GAME THEORY: Study of how people behave in strategic situations. When deciding which action to take, must consider how others might respond to that action. Just necessary for oligopolies. In our daily life, while playing cards (poker p.e.), maximizing benefits and reducing risks in an enterprise…
WHY PEOPLE SOMETIMES COOPERATE?: Renounce the maximum benefit, but avoiding the worst result/situation. So both cooperate to achieve the middle profit. The importance of penalising or imposing a threat to the counter player, is that if the counter player knows that although his strategy fails, this one is not going to lead to losses, he will choose always the risiker option which is going to penalise more the other.