Market Structure: Pakistan Economy
QUESTION 1 critically compares and contrasts the characteristics of four market structure (i.e., monopoly, oligopoly, perfect competition or monopolistic competition) regarding the allocation of resources. Provide a real life example of each market structure.
SOLUTION The four types of market structure are:
MONOPOLY – Monopoly defined as a market situation in which a single seller or producer controls a supply of goods and service, and there is no entry of any producer against the firm. Monopoly market let the producer keep the price high for their product
MONOPOLY COMPANY OF PAKISTAN
CHARACTERISTICS OF MONOPOLY MARKET STRUCTURE
SINGLE SELLER – In the monopoly market, one producer or seller produce the product and then sell it to the direct customer. The firm is surrounded by the entire market.
PRICE MAKER – the single seller set the price of the product itself. The price is determined by the quantity of the demand the required price by the firm.
NON-PRICE COMPETITION – In the monopoly market, the price is determined by the single seller of the product. The firm has right to change the price according to their real situation. If the firm understands the demand is increasing day by day, then it could keep the price of the product high. If the demand for the product is low, then it can lower the price if needed. There is direct relationship between the price and demand. The table below depicts the direct relationship between the price and demand.
PRICE
DEMAND
increase
increase
Decrease
decrease
BARRIERS TO ENTRY – There is a restriction on the entry of new sellers in the same market to sell the same kind of product. The barrier to entry of new firm to keep the price of the product as much as high.
NO CLOSE SUBSTITUTES – Because of the no entry on new firms or restriction on entry of new firm, there are no even close substitutes of the product. Substitute products are those type of product which can be use in place of each other. Like tea and coffee. If the price of the tea increases, then the consumer will buy more of coffee and less of tea. If the price of coffee increases, then the consumption of tea will increase and for the coffee decrease.
PROFIT MAXIMIZER – Due to the monopoly of firm in the whole market, profit maximizes at the highest level. If the consumer starts purchasing the product, then the seller can increase the price of the product, which will increase the profit.
PROFIT IN SHORT RUN
Source: economicshelp.org
In the above diagram, the monopoly can be seen similarly, in short run as well as long run. Profit in monopoly market occurs, when the marginal revenue equals to the marginal cost (MR=MC).
In the diagram above, the firm makes huge profits because average revenue is greater than average cost. There is no entry on the new firms in the monopoly.
PROFIT IN THE LONG RUN
Source: tutor2u.ne
In the above diagram, Marginal revenue, marginal cost and long marginal cost are equal. In the long run, price of the product is always greater than the average cost or equals to it. The price of the product cannot be below average cost because in the long run, seller wants to quit if they do not find even normal profits.
COMPARE BETWEEN MONOPOLY AND PERFECT COMPETITION
MONOPOLY
PERFECT COMPETITION
Monopoly is the market condition in which single seller produces the product and sells it in the market. Due to single policies, monopoly economy leads to the dis-allocation of resources.
Perfect competition is the market condition in which many buyers and sellers are present, but they are not selling a similar product. So, there are more chances of direct improper allocation of resources.
OLIGOPOLY –
Oligopoly is the market situation in which there are only a few sellers who sell a differentiated or homogeneous product. We can find oligopoly between the monopoly and monopolistic competition.
PAKISTAN COMPANIES OF OLIGOPOLY
CHARACTERISTICS OF OLIGOPOLY MARKET
NUMBER OF SELLERS- Under the oligopoly market, the number of sellers is few who sell homogeneous or differentiated products. There is a competition between the firms to manipulate the price and the quantity of the product to maximize its profit than the competitor (Chao, 2013).
TYPE OF MARKET – Oligopoly is that type of market in which only a few firms compete and has a majority of the market share.
ENTRY CONDITIONS – The reason behind that only few a firms competing with each other is patent rights which prevent other’s entry. There are other reasons which restrict the firms to enter in the market are; huge capital requirement, strength on raw material. There is a restriction on the entry of new sellers. But the firm can exit anytime if they are facing a huge loss (Chao, 2013).
ADVERTISING AND SELLING COST – Under this market, a firm has to incur a huge deal on the advertisement. It is very important to attract a large number of buyers. Under this competition, there is expenditure on the advertisement or other tools.
PRICE RIGIDITY – Under the oligopoly market, there is a lot of price rigidity. It is very difficult to get success in this market structure. If the firm cut the price to get success easily, then the other rivalry firms too cuts the price which tends to be difficult for the firm to get even normal profit. There is price-rigidity in a oligopolistic market.
SHORT-RUN AND LONG RUN PROFIT DIGRAM OF OLIGOPOLY
SOURCE: ammaramukhi.wordpress
In the above diagram AC = average cost, MR= marginal cost, MC = marginal cost. If the marginal cost and marginal revenue add to show the profit that can be maximized at a price. When the marginal revenue is equal to the marginal cost, profits maximize. If the marginal cost changes, the firm sticks the price of the product to gain more profit (Chao, 2013).
COMPARISION BETWEEN OLIGOPOLY AND PERFECTLY COMPETITIVE MARKET
OLIGOPOLY
PERFECT COMPETITION
In oligopoly market, the resource allocation is minimal because, under the oligopoly market, sellers get the largest market share and have less control over the market.
In perfect market competition, the resource allocation is efficient because the price of the product is equal to average cost. There is no waste cost in the perfect competition. Both buyers and sellers get what they want.
MONOPOLISTIC COMPETITION
Monopolistic competition is said to be an imperfect competition that many producers sell products different from each other. The difference in the product may be by Brand or quality. The effective quality and suitable brand name make the one’s product different from others. In this type of competition, mostly firm charge the price fixed by their rivals, not the prices fixed by them.
MONOPOLISTIC COMPANIES OF PAKISTAN:
SHORT RUN PROFIT
LONG RUN PROFIT
(Kristina, 2008)
In the short run profit diagram, under the monopolistic competition, the profit maximizes when the average revenue is greater than the marginal cost.
In the long run profit diagram of monopoly, under the monoplistic competetion, the market produces a nimber of products, where the marginal revenue intersects to the marginal cost curve. The price of the product falls when the average revenue or average revenue curve.
CHARACTERISTICS OF MONOPOLISTIC COMPETITION
NUMBERS OF FIRMS – Under the monopolistic competition, large numbers of firms is competing and try to satisfy the consumer demand as per the price and quality. Monopolistic firms do not produce perfect substitutes of the products. The products are differentiated by quality and brand name.
TYPE OF MARKET- Monopolistic competition is that type of market structure which involves both monopoly market and perfectly competitive market.
ENTRY CONDITION- under the monopolistic competition, there is very easy entry or exit of new firms to enter the new market and leave it anytime if any loss occurs. There is profit in this market structure, so many firms attracted towards it.
PART 2
QUESTION 2 Provide a brief description of negative externalities. Use diagrams to illustrate your discussion.
Externalities are the production of something, consumption of product and investment decision of the firms, households and individuals, which affect the people, but they do not directly involved in the production or investment decision. When the effect leaves large impact, it may create problems. Externalities has become the main reason that why government interfere the economic activities.
General examples of externalities:
A liquor shop in the society not only troubles the person who takes liquor but also leaves the negative impact.
There are two types of externalities:
Positive externalities- Positive externalities refer to the externalities when the social benefit of consumption and the production exceeds the private benefits.
Negative externalities- A negative externalities refer to the externalities when the private benefit exceeds the social benefit of consumption and the production.
NEGATIVE EXTERNALITIES
Negative externality is said to be the benefit where the private benefit exceeds the social benefit.
According to the above diagram, In Pakistan, a computer seller which creates pollution into the environment, then the market equilibrium occur when marginal cost of private sector equals to the marginal benefit from private sector. The q is the quantity and the p is the price. The A point shows the market equilibrium. If we take some external cost, then the social cost would be at B. At the point q, social cost is greater than the social benefits.
If the social benefit is 5, and social cost is 10, then negative externalities will be 10-5=5. Even, the gap between the Q and Q1 creates a social loss which can be shown on ABC.
REMEDIES OF THE NEGATIVE EXTERNALITIES:
The Government interferes in these matters through direct or indirect control.
The Government can give subsidy to the firms to use non-pollution appliances.
The Government must force polluters to pay penalty due on him for the pollution emits by them.
The Government must try to spread awareness to the consumer and producer to travel by air, or any non-pollutant platforms.
QUESTION 2 Using economic theory and real data from your case study analyze government solution to the problem of externalities.
ISSUE REGARDING HEALTH HAZARD AND PESICIDE USE IN PAKISTAN
Pesticides have played a prominent role in increasing the crop production with the help of insect pest control. But its inappropriate use may cause stony-faced health hazards. In Pakistan pesticides use has begun in 1950 for the control of locus. In 1954, the governments allow the use of pesticides and imported 250 tons of the same. This has been started the pesticides bustiness in the Pakistan. Pesticides used for the control of locus, pest of rice, tobacco, cotton and fruit crops. The government provides subsidy to the farmers o pesticides. The aerial spray was distributing in free of cost. In 1980, the pesticides were privatized which leads to the consumption of pesticides have been increasing from 250 tons to 14,000 tons in 2000. The increasing consumption of pesticides increased in the successive years. Because of the privatization, many complicated problems have been evoked due to the pesticides. Excessive use of the pesticides has killed many eco-friendly organisms which include birds, rats and other animals. Use of the pesticides has been rationalized (Pearce & Tinch, 2011).
. Just because the use of pesticides is necessary and its excessive use creates many health problems in the workers. Hazards like:
Pesticides enter the human body by three ways; digestive system, skin and the lungs. Pesticides which cause poisoning can be acute or chronic, depend upon the exposure to the human body. . This has been started the pesticides bustiness in the Pakistan. Pesticides used for the control of locus, pest of rice, tobacco, cotton and fruit crops. The government provides subsidy to the farmers o pesticides. The aerial spray was distributing in free of cost. In 1980, the pesticides were privatized which leads to the consumption of pesticides have been increasing from 250 tons to 14,000 tons in 2000. (Hasnian, 2014).
This poison may cause cancer, impaired immune system, reproductive results, allergies in the body and adverse reactions. If its enter in the blood can cause blood residue or mother’s milk (Pearce & Tinch, 2011).
SOURCES: (Khan, 2017)
QUANTITATIVE DATA FOR ANALYZING PESTICIDES PROBLEM IN PAKISTAN
APPLICATION OF PESTICIDES
PROBLEMS
Vulnerability during the application
Household affected (63%)
Lost days per year (5-90)
Treatment cost (1/8000)
Vulnerability during cotton crop
Number of death (87%)
Treatment cost (105)
Value of work lost (660)
Pesticides refilling
Sickness (50%)
Treatment cost (0.09)
A woman who works on farms has the greater risk of the health hazard as compare to the men because men have a better immune system than the women and much aware to take precaution (Hasnian, 2014). 70% of women’s are not aware of the health effects of the pesticides. 95% of women’s do not take any prevention measures even if they know about the problems. In the cotton farm, using pesticides creates problems in the 2.6 billion women’s who get sick for the negativity of the pesticides.
REMEDIES FOR THIS PROBLEM
The legal authorities of Pakistan must take some steps to restrict the use of pesticides by registration, awareness through advertisement, distribution in appropriate way, usage and disposal. The government should finance and monitor the distribution of pesticides. It must conduct some awareness shows for the women like “how women should protect themselves by the poisonous results of using excessive pesticides”.
The government must conduct some wellness program to aware the men and women who involve in such farm activity (S.S, 2012).
The Pakistan government must try to create such atmosphere as like they create for using pesticides to a market for crop protection system. They could involve various NGO’s to provide some help at their level. They may create such health related targets to use pesticides in collaboration with the agricultural ministries.
The Government must create such IPM methods for increasing the crop production as compared to used of pesticides. Pesticides must be use in such a way which would not harm anybody (Pearce & Tinch, 2011).
QUESTION 4 Explain the effect of externalities on monopoly, and perfect competitive market outcomes i.e. price, and quantity) including dead-weight loss. Illustrate your
EFFECT OF EXTERNALITY ON MONOPOLY
SOURCE: (Gul, 2009)
Whenever there are negative externalities, more production means more negative externality. Market structure of monopoly is superior to any other market competition. When such market failure occurs, monopoly is preferred by the owner. A monopoly is that type of market which produces fewer products as compare to the competitive market. Society prefers less production, less negative externality (commander, 2004).
For example: when a pesticides issue happens in the Pakistan, the owners of the land do not pay the medical bills of those who have suffered from the pesticides side-effects. Owners have paid the cost of land, pesticides, pay labor salary etc. but do not pay anything to the labors. So, its private benefit is more than the social benefit (Rynner, 2006).
When there is no interference of government, firm ignores the pollution and maximizes the production level. In the above figure, we have shown a monopoly market. The MCP means marginal private cost. MCp curve is the supply curve of the market, where MCp equals to the demand. The additional or marginal pollution cost cause the social harm or marginal destruction like heath issues, destruction of property and agriculture damage (Stokey, 2009). .
In the above figure, monopoly market produces less output and pollution to work with the society goals. This is true that market can produce output at q*at price p* when the MCs curve intersect the Pm (commander, 2004).
EXPLANATION OF DEAD WEIGHT LOSS ON MONOPOLY
In a perfectly competitive market, the surplus area is between the demand curve and supply curve (Stokey, 2009). .
SOURCE: (Gul. 2009)
Dead loss weight is the eruption in the economic surplus. There are certain reasons which create a deadweight loss if the social cost more than the benefits. For example: imposition of tax (indirect and indirect cost) creates dead weight loss for society as a whole, if the total benefits are greater than the total costs (Stokey, 2009). .
The reasons for dead loss weight are:
Pollution
Monopoly
Different prices
Indirect and direct tax
EXAMPLES:
Suppose, there is a manufacturing business, the wage rate for labor has decided is $10 per hour and the company has the capacity to hire 7 workers for the work done. The Pakistan government imposes a payroll tax $3 each per hour. Then, it is a duty of the government to pay $2 to the each worker who works in the firm. Then the cost of per worker will be $13 per hour. Company can afford the labor at $10, but the cost of per labor is $13per hour, then the demand of labor falls.
If the wage rate of labor falls to $7 per hour and the company has a capacity to hire 3 workers. The Pakistan government imposes a payroll tax $4 each hour. The cost per labor will be $11. The Pakistan government will impose $3*$4=$12 (Stokey, 2009).
DEAD WEIGHT LOSS IN PERFECT COMPETITION
There is no dead weight loss in the perfect market competition because under this market structure, MR=MC (Marginal Cost is equal to the Marginal Revenue) which is equal to the price. MR is the demand curve and MC is the supply curve. In the perfect competition, firms are the price taker which means they cannot influence the price fixed by the large number of sellers. The reason behind is that if the firm has increased the price of tea from $2 to $4. Then the demand of the tea will not fall, the consumers will start purchasing it from the others. If the firm has decreased the price from $2 to $1, then the demand will increase but the firm will not get normal profit to remain in the competition. In the perfectly competitive market, the firm has to accept the price fixed by the large number of buyers (commander, 2004).
P=MR
In the perfectly competitive market, price is equal to the marginal revenue. So, there is no dead weight loss because the price is equal to the marginal revenue.
REFERENCES:
Pearce, D. and Tinch, R. (2011): The true Price of Pesticides. In. Vorley, W. and D. Keeney (eds. 1998: bugs in the System- Redesigning the Pesticide Industry for sustainable Agriculture, Earthscan, London, pp.51-93
S.S. (2012): Pesticides and the Immune System: The public Health Risks, New York, World Resources Institute, USA
Inayatullah, C. and Haseeb, M. (2000): Poisoning by Pesticides, Pakistan Journal of Medical Research, 35(20): 57-58
Khan, M. (n.d.). Harmful pesticides. Retrieved August 23, 2017.
Hasnian, T. (2014) Pesticide Use and Its Impact on Crop Ecologies: Issues and Options. Sustainable Development Policy Institute, Islamabad. (SDPI Working Paper Series.)
Katz, M., Shapiro, C., 2011. Network externalities, competition, and compatibility. American Economic Review 75, 424–440.
Stokey, N.,2009. Rational expectations and durable goods pricing. Bell Journal of Economics 12, 112–128.
LOERTSCHER, S. (2008). MARKET MAKING OLIGOPOLY*. The Journal of Industrial Economics, 56(2), pp.263-289.
Hassan, Tamir, and Robert Baumgartner. “Monopoly market structure.” Economics, 17 Oct. 2006, doi:10.1145/1135777.1135935.
Commander, F. (2004). Oligopoly. Market structure of economics, 10(4), 251-251. doi:10.1177/074171366001000414
Keuschnigg, C. (2006). Extensive and Intensive Investment and the Dead Weight Loss of Corporate Taxation.
CHAO, Y. (2013). STRATEGIC EFFECTS OF THREE-PART TARIFFS UNDER OLIGOPOLY. International Economic Review, 54(3), 977-1015.
Ago, T., Hamoudi, H., & Lefouili, Y. (2015). Firm location and monopolistic competition. Papers In Regional Science, 96(1), 211-219.
Rynner, C. (2006). monopoly in the Dead Weight Loss, 56(1),166-189