micro- competition policy (monopolies v. perfect competition)

define natural monopoly

• an industry structure where a single firm can supply the entire market at a lower average cost than two or more competing firms due to high fixed costs

explain why high fixed infrastructure costs makes single- firm supply more efficient

• industry requires large upfront sunk fixed costs (e.g. laying water pipes/ rail networks) before it can supply the product

• single- firm supply avoids duplication of this expensive infrastructure

• one firm can spread the fixed infrastructure cost over a larger level of output, reducing average costs and creating internal economies of scale

what is a monopoly?

• a firm with over 25% market share

define productive efficiency

• occurs when production takes place at the lowest possible cost per unit, operating at the minimum point of the Short-Run or Long-Run Average Cost curve

define allocative efficiency

• occurs when resources are distributed to produce the combination of goods and services most desired by society

• achieved where price equals marginal cost (P = MC)

define dynamic efficiency

• improvements in productive efficiency and product quality over time

• achieved through continuous investment of supernormal profits into R&D, capital amelioration and innovation

define X- inefficiency

explain why greater competition leads to lower prices

• more firms compete for market share

• firms lower prices to attract customers

• price competition reduces firms’ market power

• consumers pay lower prices and buy more

• therefore, consumer surplus and welfare increase