Economics Four Market Structures With Negative Externalities

Questions: A. Identify the key characteristic of four market structures (ie. monopoly, oligopoly, perfect competition or monopolistic competition). Give a case study example of each market structure.?B. Explain what negative externalities are, and why there may be a case for government intervention to address them. Describe some of the ways to correct the negative externalities and the pros and cons of each method. Provide real life examples?C. Choose a case study from your home country where an externality exists in a current market. Illustrate the situation with externalities in your case study and the resulting deadweight loss in a diagram and discuss ways that your government has addressed the presence of negative externalities in the market? Answers: Introduction Economic activity helps in analyse the production and consumption of goods and services within and outside the economy. There has been ample evidence given by the economist all throughout the years economic is mixture of social and science (De Nicoloi et al. 2012). The study of economic will help to analyse the current market structure of the economy and the reason for the high and low consumption of goods and services. Apart from that study will also focuses on the negative externality which is another major factor that influences the market interventions. Besides that the study will also give an insight of the externality exist in the current market and diagram of dead weight loss will address the government way of handling the issues (Arnold, 2001). A. Characteristic of the four market structure 1.1Monopoly Market In monopoly form of market, there is large number of buyers are single seller. Monopoly market in the current contemporary business is less because most of these firms are acquired by the government organisations in order to distribute in equally among the firms (Arnold, 2001). Some of the major characteristics of monopoly market are given below: single seller and large number of buyers also knows as the price maker unique products and services , no substitutes high barrier for entry Chances of price discrimination is higher Profit maximization British Telecom British telecom is a perfect example of maintaining the monopoly power within the UK market. British telecom is own and control by the government. It has business over the 170 countries as BT global services (Civic and Miklaucic, 2011). British telecom is first telecommunication communication which was established 1878 by graham bell. The company is number one broadband selling company of UK. There is no close competitor neither a close substitutes. Company has earnings of more than 2.91 billion in 2013. It is known for profit maximizations government owned company. Figure 1: Monopoly market, profit maximizations The diagram depicts the profit maximization of the firm in long run. The demand curve is equal to the average revenue curve which shows that, company total earning is higher than its investment which is approx 3 billion (Greenleaf, 2011). BT is selling low cost tariff broadband services and mobile phone network services which is only sold by the BT has made the company to reach at top position of in the telecommunication sector. 1.2Perfect competition Market At the perfect competition market, there are large number seller identical goods to the buyers. The term perfect competition does not exist in the modern economy but the selling of identical product is common in the current contemporary market (Helpman, 1990). Some of the major characteristics of the perfect competition market are s given below: Large number of seller and large number of buyers Identical or same products sold Free entry and exit No chance of price discriminations Normal profit in long run Grocery items sold by the different retail stores like Coles and Woolworths Grocery products are sold by the large number vendors in the market to the large buyers. Almost all of the products are same and identical in the market. Price and quality of the products are same along with no chances of price discriminations (Krugman and Wells, 2006). At perfect completion is there is no single seller and price is governed by the market demand of the products. Figure 2: Normal profit curve for the Perfect competition market From the above figure, it has been found that, grocery market in long term earn only normal profit because of the product are same and identical. Apart from the number of firms like Aldi and Spar are opening their market in the Australia has reduce the business of local retail chain like Woolworth and Coles (Nagler, 2013). With the rise in the competition, lots of small firms and loyal groceries stores are closing their business as there is no exit barriers and this shifting the industry supply to the left which convert those existing firm which is deriving the normal profits. 1.3Monopolistic competition In this type of market, small numbers of firms are selling different products to the large buyers. The products and services which are sold in this market are differentiated and is non price competitions. In monopolistic competition is very much imperfect competition because of quality of the products and services or the high brand value (Tillema et al. 2012). Characteristics of the monopolistic market: Free entry and exit Product and services are sold are different in terms of quality and price or high brand value Large number of buyers and small seller In long run, firms earn normal profit A case of hotel business Hotels in Australia like Hilton and royal garden are some of the major examples of monopolistic competitions. This hotel serves various types of services to the customer and has different ranges of price along with quality (Laengle and Loyola, 2010). The quality of the five start hotel and their services are being one of the major differentiated way of selling their rooms and food. Figure 3: Long run, normal profit for hotels in Australia From the above diagram, hotel business in worldwide are very much same but the selling of the services styles are different form one another which is why the firm earn normal profit in long run because of the competition (Ciegis and Pusinaite, 2010). At price P1 hotels are able to earn LRAC demand curve which is because of the demand of curve has shifted as other new hotels are opened which turns the supernormal profit into normal profits. 1.4 Oligopoly Oligopoly market is based on the large number of buyers and only few sellers. Such as tooth paste companies sand the wafers companies. Oligopoly market is very much innovating their form of products and services in order to beat the competitors. Some of the major characteristics of the firm are as given below: Large number of buyers and only few sellers Firms are very much interdependent Entry barriers because of the existing has capture large market share Huge amount of investment is required In the long run the company has kinked demand curve Colgate Palmolive Colgate Palmolive is Australia is number 1 tooth Paste Company. Company is American multinational but has branches all over the world. Colgate Palmolive sells the large number of tooth paste to the large sellers and there are only few competitors like Oral B and Pepsodents etc (Amelio and Biancini, 2010). With the innovations for marketing the products company is the apex position in the market. Figure 4: kinked demand curve for the Colgate Palmolive This demand curve shows the relationship between the price and quantity demanded. For instance, if the Colgate has reduced its price with 85c within its products then sale of the products will be high in compare to Oral B. However, in order to compete in the market Oral B also has to change its price by 85 c to sustain (www.aic.gov.au, 2015). This shows the interdependency of the firm within the market. Apart from that, advertisement and products innovation in this type of firm is very much seen because of the fierce competition by the few sellers. B. Negative Externalities Negative externalities are cost that is borne by the third party whne the transaction is between the buyer and seller is completed. Producers and consumer are first and second parties but third party will be property owner or the resources which is getting suffered due to the producing of products. Externalities is type of external cost which suffered by the third party as part of transactions. Some of the major externalities are waste, carbon emissions and the pollutant air which creating the problem for the surrounding and the environment (Haigh and Griffiths, 2008). There have been numerous occasions where these transactions have derailed the human life by creating huge pollutions. Figure 5: Negative Externalities diagram (Source: Negative externalities show the price paid by the third part that is paying because of the consumption and production of the foods. There are several examples of the production of and consumption such as production of music system turns the music loud which may creates problems for the neighbor, production of chemical fertilizers helpful to the farmers but decreasing the productivity of the land and production of car results into pollutions within the environment (Amelio and Biancini, 2010). For instance, a case of Haifa group is known as one of the major company deals in the fertilizer which emits pollutions into the atmosphere while producing it. Marginal private cost = marginal benefit which is situated at output Q and price P. equilibrium is at point A. however, while assessing the external cost , the efficient output is Q1 at point B and At point Q marginal cost is at C which will be greater than the marginal social benefits which results into net loss. If the MSB at pint A for Haifa production = 1 million MSC at C is =2 million The net welfare loss would be = 1 million (pollutions) 2.1 Government interventions Government has related various laws and environmental acts to prevent the negative externalities. Apart from that, government of Australia has brought competition act 2010. Government has conducted various norms such as clean energy act 2011 which has been reform by the government in order to posses strict norms for the companies to produce recyclable products (Kim and Day, 2010). Apart from that, government also has reformed the water act 2007 which depicts that, company throwing sewerage in the river must have to huge amount of water tax and Sewerage tax which creates price of the product more and people purchase less. New South Wales environmental offences and penalties act 1989 prevents the manufactures to commit disposal without the lawful authority with maximum penalties worth of $225000 in case of breaching air and water pollutions and long with 7 years of imprisonment for natural person for doing contaminating the society (Environment.gov.au, 2015). These are some of the inte rvention does the Australian law prevent the manufacturer and the consumers to control the negative externalities. 2.2 Method of controlling the negative externalities Penalty and imprisonment: Government of Australia is very much active to reduce the pollutions and wastage garbage form the domestics for which several norms has been made one of the them is Environmental and penalties act 1989, an office of disposal of unlawful garbage negligently that harms other will have to pay more than 125000 penalty with 7 years of jail terms (Zehner, 1991). Apart from that, other major act is environmental protection act 1978 and noise Abatement act respectively suggest that culprit has to pay more than $100000 and $5000 and 5 years to 6month of imprisonment. Carbon emission act: Clean energy act 2011 has been reformed that abolishes carbon mechanism act. It provides the various types of programmes to manage the electricity and use of solar power pane (Ramjeawon, 2000). Apart from that clean energy act, there is carbon pollution reduction scheme which was marketed based on the greenhouse gas pollutions which was implemented in 2010. C. Externalities present in sugarcane production of Australia 3.1Envionrmnetal Externalities in New South Wales Australia Externality present in the sugar cane production is very much known to the Government of Australia. The environmental externalities associated with sugar cane productions is land use which includes different sources of chemical pollutions arousing such as pesticides, fertilizers and mill sewage (Revankar and Shyama, 2009). One of the major reasons for land is become unproductive is excessive use of pesticides in land and the expansion of production area of sugarcane. The land is getting affected by the farming on acid sulfate solid which is also polluting the wetlands and riparian areas. Whenever the market operates freely and widely prices of goods and services generally indicate their value to the society and the reuses allocations will be based on the demand and supply of the cane. Sugar cane farming requires extensive use of land and the water along with large amount of pesticides which tend to creates detritions of land quality for longer period of time known as the monoculture (Sooresh et al. 2014). Fertilizer such as the nitrogen and the phosphorous which are used to produce the sugarcane also pollute water and soil which gain increase the airborne disease within the society which tends to cancer and death of many individuals. The presence of negative externality shows the poor and weak efficiency of the government of Australia (Stepanova and Tesoriere, 2010). These chemical fertilisers have enough power to destroy the great barrier reef of world heritage area and also can create increase in the social cost of living. The famers of cane are polluting the land, water and air to maintain a productive cane crop which is also known as the waste sink. This negative externality in environment also had been because of the failure of the government interventions and the cane grower (Untaru, 2002). The system of the industry is very much developed in early 20s that has and the free use of waterway, leading to the production of sugarcane and allows the chemicals to be suffered as the social cost. Figure 6: Deadweight loss from the cane productions The dead weight loss for the company is been excess of burden is a loss of economic efficiency which has been occur whenever the demand of the cane is been poor. For sugar cane industry in 2008, there was huge loss because of the economic turmoil in Australia which tends to decrease the sale of the sugarcane (Ville, 2013). Deadweight loss here could also explain the monopoly way of pricing the products. Due to recession in deadweight loss of total welfare or the social surplus is for the reason of environmental externalities (Environment.gov.au, 2015). It is a loss of environment due to loss of trade participants which is based on the consumers, producers or the government. As matter of fact Australian sugar industry has been committed by both been both direct and indirect form of negative externalities. Opportunity cost of the foregone here would be value of land and the benefit is producing high yield sugar which is booking the economy. The demand of the sugar has been rise since 1991 because of the rise in populations and the raise in the various coffee shops and restaurants along with cake shops (ageconsearch.umn.edu, 2015). The cane grower also knows the side effects of use of the chemicals and which is decreasing the fertility of land and creating the water borne disease due to increase in the chemical fertilisers. Although the production of sugarcane has been all time high because of use of strong chemical fertilisers but industry has overlooked the welfare profit which gain results into poor outcome or loss (www.aic.gov.au, 2015). Government address the presence of externalities in the Sugarcane industry Nutrient management: the impact of the sugarcane production has depleted the nutrient of water body within the cane productions areas has become very much important to issues in recent times. This issue has been raised particularly because of the water quality of the GBRWHA drainage system is producing very much water borne disease to the people like stomach pain, viral fever and ulcers etc (Sooresh et al. 2014). government of Australia has used water act 2007 which prevents the cane growers to use to non-fertiliser of the production of sugar. Apart from that, water efficiency labeling act scheme has made the sugarcane industry to stop the use of hazardous chemical in the sugarcane. The breach of act will have to pay more than $ 25000 and 2 years of imprisonment (Stepanova and Tesoriere, 2010). Environmental policy: Hazardous waste act 1989 has created various schemes comprise of various porgrammes like Organic revolution programme which has been flowed all over the Australia to reduce the work of pesticides on eating materials (Untaru, 2002). Along with hazardous waste act 1989 act revised bill has been created revolution against those farmers who are extensively using the pesticides and harmful chemicals to destroy the land by penalty worth of 210,000 and 2 years of imprisonment. Some of the government initiatives during the year by the NSW state pollution control commission protection authority are as given below: Years Number 1984 15 1985 22 1986 68 1987 36 1988 78 1999 73 1991 69 1992 54 Air pollution act: Air pollution act 1984 and water pollutions act 1984 were amended in 1991 which increases their penalties. Air pollution act 1984 has given the maximum fine for the emission of the nitrogen in air for which fine is $50000 for the sugar cane corporations. Since, 1989, reviews of pollutions for the legislations is been taken seriously in NSW in order to establish an environmental protection authority (www.assct.com.au, 2015). Apart from that, these all legislations have been able to decrease the pollution of chemical in sugarcane growing consistently. With rise in effective technology most and demand of customer of organic food is creating to reduce the effect of chemical fertilizer within the sugarcane (www.aic.gov.au, 2015). Conclusion From the above, it has been found that, monopoly market is not been seen in the current contemporary market because of the government organizations has been taken most of these forms. Perfect competition market can be seen in the grocery market and in this market free entry and free exit. Apart from that, monopolistic competition is been seen in the modern economy via differentiating the goods and services by using quality, branding and advertisement. The negative externalities are occurred by the producers and consumers which has been borne by the third party. To achieve sustainable development in sugar industry at NSW more of environmental norms has been use to maintain strategic planning activities. The sugar can grower are using harmful chemical to produce higher amount of sugar which is gain reducing the productivity power of soil and increases the water borne diseases. Reference list Books De Nicoloi, G., De Nicoloi, G., Favara, G. and Ratnovski, L. (2012). Externalities and Macro-Prudential Policy. Washington, D.C.: International Monetary Fund. Arnold, R. (2001). Economics. Cincinnati, Ohio: South-Western College Pub. Civic, M. and Miklaucic, M. (2011). Monopoly of force. Washington, D.C.: National Defense University Press. Greenleaf, W. (2011). Monopoly on wheels. Detroit, Mich.: Wayne State University Press. Helpman, E. (1990). Monopolistic competition in trade theory. 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