Economic Regulation and Market Structure Flashcards

Comprehensive vocabulary flashcards covering economic regulation, market structure, public policy, and related mathematical calculus concepts.

Allocative Inefficiency

Occurs when resources are not distributed to maximize total surplus, typically because a firm with market power restricts output to raise prices.

Antitrust Law (Competition Policy)

Legislation designed to reduce market concentration and power by making it illegal for firms to harm the competitive process or reduce economic efficiency.

Average Cost (AC) Pricing

A regulatory pricing strategy where the regulator mandates that a firm set its price equal to its average cost ($P=AC$), typically resulting in zero economic profits.

Bertrand Model

An oligopoly model where firms compete by simultaneously choosing prices rather than quantities.

Best-Response Function (Best-Reply)

A function that specifies the profit-maximising quantity or price for a firm given the choices made by its competitors.

Chicago School

A school of economic thought that generally views vertical mergers and restraints as benign or efficient, arguing that firms have little incentive to harm competition without a corresponding efficiency gain.

Cournot Equilibrium

A Nash equilibrium in a model where firms produce homogeneous goods and compete by simultaneously choosing quantities.

Deadweight Loss (DWL)

The loss in total surplus that occurs when a market outcome is not efficient, often illustrated as the lost value from consumers whose willingness-to-pay exceeds marginal cost but who do not consume because of high monopoly prices.

Double Marginalisation

Occurs when both an upstream monopolist and a downstream monopolist add their own profit margins to a product, leading to higher retail prices than if the firms were vertically integrated.

Dynamic Inefficiency

The failure of a firm to invest in or innovate at an appropriate or socially optimal level due to a lack of competition.

Economies of Scale

A situation where a firm's average cost of production falls as its output increases, often due to high fixed costs and low marginal costs.

Market Power

The ability of a firm to profitably set and maintain a price above marginal cost.

Marginal Cost (MC)

The incremental increase in total cost that arises from producing one additional unit of output.

Marginal Cost Pricing

A 'first-best' regulatory solution where the price is set equal to marginal cost ($P=MC$) to maximise social welfare, though it may lead to negative profits for natural monopolies.

Marginal Revenue (MR)

The additional revenue generated by selling one more unit of a product.

Nash Equilibrium

A stable state in a strategic game where each player's strategy is optimal given the strategies chosen by all other players.

Natural Monopoly

An industry where costs are subadditive, meaning one firm can produce the entire market output at a lower cost than two or more firms.

Oligopoly

A market structure characterised by a small number of sellers who recognise their interdependence.

Pareto Inefficiency

A state where it is possible to make at least one party better off without making any other party worse off.

Public Economics

The study of how the government regulates the behaviour of firms and individuals particularly through regulation, as opposed to public finance which focuses on raising and spending tax money.

Regulatory Policy

Government rules that establish maximum prices or revenues for specific services, primarily applied to natural monopolies like electricity lines or gas pipelines.

Stackelberg Model

An oligopoly model where firms move sequentially; a 'leader' firm chooses its quantity first, and a 'follower' firm responds after observing the leader's choice.

Subadditive Costs

A cost structure where the cost of a single firm producing a certain output is less than the total cost of multiple firms producing portions of that output.

Total Surplus (TS)

The sum of consumer surplus (the difference between willingness-to-pay and price) and producer surplus (the difference between price and marginal cost).

X-Inefficiency (Cost Inefficiency)

An inefficiency arising from the failure of a firm to minimise its production costs, often due to a lack of competitive pressure.

Exclusive Dealing

A vertical restraint where a downstream firm (retailer) agrees to purchase goods or services only from a specific upstream supplier.

Foreclosure

An anticompetitive effect where a vertically integrated firm uses its power at one level of the supply chain to disadvantage rivals at another level (input or customer foreclosure).

Horizontal Merger

The consolidation of two or more firms that operate in the same market at the same level of the supply chain.

Tying

The practice of conditioning the sale of one product (the tying product) on the purchase of a second, separate product (the tied product).

Vertical Merger

A merger between firms that previously had a buyer-seller relationship, operating at different levels of the same supply chain.

Vertical Restraints

Agreements between upstream and downstream firms that place specific limits on the behaviour of one of the parties.

Amnesty/Leniency

A program where the first member of a cartel to report illegal activity to authorities can avoid criminal charges and government fines.

Cartel

A group of firms that coordinate their pricing or quantity decisions to act like a monopolist and increase collective profits.

Explicit Collusion

Coordination between firms that involves direct and express communication regarding prices, quantities, or market allocation.

Parallelism Plus

A legal doctrine where parallel firm behaviour combined with 'plus factors' inconsistent with independent competition is used to prove unlawful collusion.

Tacit Collusion

Coordination between firms that occurs without direct or express communication, often through public signals or announcements.

Trigger Strategy

A strategy in repeated games where firms agree to a collusive outcome but permanently switch to a competitive (punishment) outcome if any member cheats.

Benefit-Cost Analysis (BCA)

A systematic framework to determine if a policy's total benefits to society exceed its total costs.

Bounded Rationality

A behavioural anomaly where individuals are unable to fully process information or act with complete rationality when making long-term decisions.

Contingent Valuation (Stated Preference)

A survey methodology used to value non-monetary benefits by asking individuals how much they would be willing to pay for a hypothetical improvement.

Discount Rate ($r$)

The rate used to convert future benefits and costs into present value, reflecting time preference and the opportunity cost of capital.

Double-Dividend Hypothesis

The idea that environmental taxes can provide improved environmental quality and increased economic efficiency by using tax revenue to reduce distortionary taxes.

Environmental Tax Reform (ETR)

A policy of shifting the tax burden from 'goods' (like labour) to 'bads' (like pollution).

Externality

A cost (negative) or benefit (positive) resulting from an economic activity that affects a third party who did not choose to incur it.

Hicksian Potential Compensation Principle

The principle that a policy is efficient if those who gain could potentially compensate those who lose, making everyone at least as well off as before.

Nudge

A policy instrument that uses suggestions or invitations to steer people toward decisions in their self-interest without providing explicit economic incentives or rules.

Performance-based Standard

A regulation that specifies a target to be achieved (e.g., a pollution limit) without mandating the specific technology used to reach it.

Pigouvian Tax

A tax set equal to the marginal external cost of an activity to internalise a negative externality.

Pollution Permit Trading (Cap-and-Trade)

A system where the government sets a total limit on pollution and issues tradable allowances to firms.

Technology-based Standard

A regulation that mandates the use of specific equipment or methods to achieve a goal.

Value of a Statistical Life (VoSL)

The aggregate value individuals place on small reductions in risk, used by governments to monetise health and safety benefits.

Willingness-to-Pay (WTP)

The maximum amount an individual is prepared to sacrifice to acquire a good or avoid a risk.

Derivative

A measure of the rate of change along a function, representing the slope of the function at a specific point.

Domain and Range

The Domain is the set of all possible inputs for a function; the Range is the set of actual outputs produced.

Function

A mathematical rule that relates each input to exactly one output.

Partial Derivative

The derivative of a function with more than one variable, taken with respect to one variable while treating all others as constants.

Stationary Point

A point on a function where the derivative equals zero, indicating a potential local maximum, minimum, or point of inflection.

Conversion Cost ($C$)

The marginal cost of producing a downstream good, excluding the cost of the raw input.

Vertical Integration

When two components of a supply chain are owned and controlled by the same entity.

Derived Demand Rule (A): Monopoly-Monopoly Scenario

If there is a monopoly both upstream and downstream, the derived demand curve for the input is obtained by shifting the MR curve for the downstream good down by $C$ units.

Derived Demand Rule (B): Monopoly-Competition Scenario

If there is a monopoly upstream but perfect competition downstream, the derived demand curve for the input is obtained by shifting the inverse demand curve for the downstream good down by $C$ units.

The 'Holy Trinity' of Inefficiencies

The three inefficiencies often caused by market power: allocative inefficiency ($P > MC$), cost inefficiency (failure to minimise costs), and dynamic inefficiency (failure to innovate).

Adam Smith’s 'Invisible Hand'

Represented by the welfare equation $MSB=MB=P=MC=MSC$, where resources are allocated perfectly so any unit with social benefit exceeding social cost is produced.

Grandfathering

A method of allocating pollution permits for free based on a firm's historical emission levels.