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REVIEW
CHAPTER 1

THE BASIS FOR INTERVENTION OF GOVERNMENT

 ANALYZING ECONOMIC EFFICIENCY
BASIC CONDITIONS FOR PARETO EFFICIENCY

 Exchange efficiency: MRSAXY = MRSB XY = PX/PY

 Production efficiency: MRTSX KL = MRTSY KL = r/w

 Product mix efficiency: MRSXY = MRT XY = PX/PY

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Imperfect
 Market failures of efficiency competition
(monopoly,
oligopoly)
Unemployment
and other
Public goods
macroeconomic
disturbances

Market
failures

Imperfect
Externality
Information

Incomplete
markets
(innovation,
asymmetric
information)

CHAPTER 2. MONOPOLY
Definition and origin of monopoly

The inefficiency of monopoly

Regulating monopoly

Case study analysis

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2.1. INTRODUCTION OF MONOPOLY

 Perfect competitive market?

2.1. INTRODUCTION OF MONOPOLY

 Imperfectly competitive market?
Limited
number of
firms
Firms have
some control “heterogeneous”
over prices products
Imperfect
competition

Information Difficult
NOT widely entry and
available exit

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2.1. INTRODUCTION OF MONOPOLY

 Discussion
Is the oil market, telecommunications market, banking market, real
estate market in Vietnam perfectly competitive?

2.1. INTRODUCTION OF MONOPOLY

 The petroleum market
Petroleum market share in Vietnam in 2020, by brand

3% 15%
5%
49%
7%

21%

Petrolimex PV oil Sai gon Petro Mimecorp Thalexim Others

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2.1. INTRODUCTION OF MONOPOLY

 Telecommunications market
Market Shares of Mobile Phone Service Providers by Subscribers in 2016

2.1. INTRODUCTION OF MONOPOLY

 Banking market

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2.1. INTRODUCTION OF MONOPOLY

 Real estate market

2.1. INTRODUCTION OF MONOPOLY

 Types of markets

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2.1. INTRODUCTION OF MONOPOLY

2.1. INTRODUCTION OF MONOPOLY

 Types of markets

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2.1. INTRODUCTION OF MONOPOLY

 General types of imperfectly competitive markets

Monopolistic competition
• Many firms selling slightly differentiated products

Oligopoly
• Few firms selling products with varying degrees of differentiation

Monopoly
• ONE firm selling product that has no (or few) close substitutes

Natural monopoly
• A monopoly - high infrastructural costs, the largest supplier in an industry

2.1. INTRODUCTION OF MONOPOLY

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2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Definition: is a market characterized by a single seller, selling the
unique product with the restriction for a new firm to enter the
market.

2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Features of a Monopoly Market
 Single Seller of the Product
 Entry Restrictions
 No Close Substitutes
 Price Maker

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2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Features of a Monopoly Market

All of the following are characteristics of a monopoly except:

A.there is a single firm.
B. the firm is a price taker.
C. the firm produces a unique product.
D.the existence of some advertising.

2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Origin of monopoly

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2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Origin of monopoly

Technical
Economic
barriers
barriers

Legal
barriers

2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Origin of monopoly

 Economic barriers:
- The industry has economies of
scale, the cost of production
per unit decreases with
production scale => monopoly
is more effective

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2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Origin of monopoly

 Technical barriers:
- Network effects
- Natural monopoly: A low-cost productive technique
- Others
- Special knowledge of a low-cost method of production.
- Ownership of a unique resource.
- Possession of unique managerial talents.

2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Origin of monopoly
 Legal barriers:
- Permission of the State: legalization of monopoly or to serve
some goals of the State
- Legal Patents
- Knowledge and expertise

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2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Types of monopoly
 Monopsony
- Only one buyer ( or a group of buyers)
- Monopoly power: change price (or buy at lower prices)
- In market economy: Not popular

2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Types of monopoly
 A natural monopoly:
- A monopoly in an industry in which
high infrastructural costs and other
barriers to entry relative to the size
of the market give the largest
supplier in an industry
- Often the first supplier in a market,
an overwhelming advantage over
potential competitors.

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2.1. INTRODUCTION OF MONOPOLY

 Monopoly
 Types of monopoly
 Oligopoly

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2.2. MONOPOLY– INEFFICIENT MARKET

 Profit Maximization of Monopoly

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2.2. MONOPOLY– INEFFICIENT MARKET

 The Inverse Elasticity Rule
- The gap between a firm’s price and its marginal cost is inversely
related to the price elasticity of demand facing the firm

where Ed is the elasticity of demand for the entire market

- Two general conclusions about monopoly:
- a monopoly will choose to operate only in regions where the
market demand curve is elastic, Ed < -1
- the firm’s “mark-up” over marginal cost depends inversely on the
elasticity of market demand

2.2. MONOPOLY– INEFFICIENT MARKET

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2.2. MONOPOLY– INEFFICIENT MARKET

2.3. REGULATING MONOPOLY

 Why the Government regulates monopolies?
 Prevent excess prices
 Quality of service
 Monopsony power
 Promote competition
 Natural monopolies
 Goals of regulating monopoly

 Competitive price or close to the MC

 Increase quantity of product
 Regulate super-profit of monopoly firms to spend for social activities
 Decrease DWL

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2.3. REGULATING MONOPOLY

 How the government regulate monopolies

Increase competitiveness for monopoly businesses

Impose regulations for monopoly businesses

Change private monopoly into State monopoly

Levy tax

Do nothing

2.3. REGULATING MONOPOLY

 How the government regulate monopolies
- Increase competitiveness for monopoly businesses: promulgate
antitrust laws
- In Vietnam: Competitive law No. 23/2018/QH14 issued on June 12,
2018, takes effect from July 1, 2019, controls the competition
restriction acts, acts of unfair competition.

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2.3. REGULATING MONOPOLY

 How the government regulate monopolies
- Monopoly pricing

Pmax = MC
Profit: PmaxCEC2

2.3. REGULATING MONOPOLY

 How the government regulate monopolies
- Monopoly pricing

Pmax > MC
Profit: PmaxCEC2

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2.3. REGULATING MONOPOLY

 How the government regulate monopolies
- Monopoly pricing

Pmax < MC
Profit: PmaxHEC2

REGULATING MONOPOLY
 How the government regulate monopolies
- Impose tax per unit of output

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REGULATING MONOPOLY
 How the government regulate monopolies
- Impose tax per unit of output

REGULATING MONOPOLY
 How the government regulate monopolies
- Impose Lump Sum Tax

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REGULATING MONOPOLY
 How the government regulate monopolies
- Impose Lump Sum Tax

2.3. REGULATING MONOPOLY

 Exercise
The market demand function for product X: P= -1/4Q +280, and only
company A monopolizes the production of this product with a total
cost function TC = 1/6Q2 +30Q+15000.
a) If the government taxes each product at t=25$/product, what is
the company's selling price, output, and profit?
b) If the government does not levy tax per unit of output but
calculates a a lump sum tax for company A of T=10.000$, what is
the company's selling price, output, and profit?

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2.3. REGULATING MONOPOLY

 Exercise
a) Before tax, company produce at MR=MC:
• Marginal Revenue MR = ∆TR/∆Q = (TR)' = (PQ)' = [(a.Q+b).Q]' = (aQ2
+bQ)' => MR = 2a.Q + b =2.(-1/4Q)+280 = -1/2Q+280
• Marginal cost MC =TC'=1/3Q+30• MR=MC => -1/2Q+280 =1/3Q+30
=> Q=300; P=205$
• Total Profit =TR-TC = P.Q – (1/6Q2 +30Q+15000) = 61500-39000=
22500$

2.3. REGULATING MONOPOLY

 Exercise
a) If the government taxes each product at t=25$/product:
• Total cost TC1 = TC+t.Q = 1/6Q2 +30Q+15000+25Q
• Marginal cost MC1 =TC1 '=2.1/6.Q+30+25=1/3Q+55
• To maximize profits, company A will produce at: MR=MC1
 -1/2Q+280 =1/3Q+55 => Q=270; P= 212.5$
• Total Profit =TR1 -TC1 = P1 *Q1 – 42000 = $15375
 Before tax, selling price is P=205, Q=300, total profit is $22,500
 After tax t=25$/sp, the selling price increases P=212.5, Q
decreases=270, total profit is 15375$

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2.3. REGULATING MONOPOLY

 Exercise
b) If the government levies a lump sum tax of T= 10000$
• Total cost TC2=TC+T=1/6Q2+30Q+15000+10000
• Marginal cost MC2=MC=1/3Q+30
• To maximize profit , company A will produce at: MR=MC2=>
1/3Q+30=(- 1/2Q)+280 => Q=300 and P=205 $
• Total profit =TR2 -TC2 = 61500-49000= 12500
 Before tax, selling price is P=205, Q=300, total profit is 22500$
 => After tax T=10000$, then P=205, Q=300; maximum total profit
is 12500$, reduced exactly by tax T=10000$

2.3. REGULATING MONOPOLY

 How the government regulate monopolies
- Impose regulations for monopoly businesses

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2.3. REGULATING MONOPOLY

Regulating a natural monopoly: according to the principle of price
efficiency, P=MC, subsidy added to compensate for the loss (orange)

2.3. REGULATING MONOPOLY

In a competitive market, equilibrium price and output show the levels of production and consumption that
result in optimum economic efficiency. In a monopolistic market, however, since output is lower and price is
higher than the competitive equilibrium there is a loss to society. The government therefore often takes
measures to regulate or control monopolies.
One measure is to make the market more competitive. A few years ago, for example, Honda motorbike
producers could be considered monopoly in the Vietnamese market and the unit price was close to
US$2,500. However, since the government allowed imported and domestically assembled motorbikes of
different brands to be sold, the resulting competitive pressure forced Honda motorbike producers to lower
their prices by 50%.
With regard to monopolies that have exclusive access to strategic resources such as energy and gas, the
government can use taxes to reduce their excess profits. The corporate income tax, for example, levied on oil
companies in Vietnam is 50% while the typical rate applied to other industries is 32%.
Price control is another measure that the government uses to regulate natural monopolies such as railroad,
power, and water supplies. In this case, a maximum price is allowed based on a fair rate of return that the
monopolist will earn from its capital investment and the risk that it will face.
Yet, eliminating monopoly can at times be adverse to social welfare if governments do not have additional
measures to prevent negative externalities. The motorbike problem in Vietnam traffic today is an example.
Therefore, the need and method of regulating monopolies is a topic still under debate in economics.

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2.3. REGULATING MONOPOLY

P ($)  Pricing at average cost
a) Determine the monopolistic output
when the firm is unregulated and
the socially optimal level of output?
b) When the government controls
price by marginal cost, how much
must the government subsidize the
firm in order to maintain production
in the long run? In your opinion, is
there any way for the government
to not have to compensate for
losses?
Q (tons)
c) When the government controls
prices by average cost, how much is
the social benefit loss?

2.3. REGULATING MONOPOLY

 Pricing at average cost
P ($)
a) When the firm is unregulated:
- MR=MC => Q=220 and P=90
- The output level that maximizes
social welfare is achieved at MB=MC
=> P=20, Qxh = 450

Q (tons)

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2.3. REGULATING MONOPOLY

 Pricing at average cost
P ($)
b) When the government controls the
price P=MC = 20 => Qmc=Qxh=450
- Total social surplus is maximized
(because P=MB=MC)
- The firm has a loss because at this
Loss
level of output the average cost is
high more than selling price
- Total loss is the area of rectangle
MNPQ
Q (tons) - Profit of firm = Total revenue – Total
cost = P.Q – ATC.Q = (P-ATC).Q = (20-
35).450 = – 6750

2.3. REGULATING MONOPOLY

 Pricing at average cost
P ($)
c) The government controls prices by
ATC
- P = ATC = 50, output QATC=350
=> The firm break even (P=ATC)
Loss
- There is a loss of social welfare
(because MB>MC), (Qatc) < Qxh)
- Loss = Area of triangle
= 1/2.(Patc-Pmc).(Qmc-Qatc)
=1/2.(50-20).(450-350) = 1500
Q (tons)

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MULTIPLE CHOICE

1. In a natural monopoly, the solution of pricing ceiling is equal to

marginal cost will:
a. The loss of social welfare cannot be remedied
b. Recover all social welfare losses
c. Recover a part of the loss of social welfare
d. There are no correct answers

MULTIPLE CHOICE

2. In a natural monopoly, the solution of pricing ceiling is equal to

average cost would:
a. The loss of social welfare cannot be remedied
b. Recover all social welfare losses
c. Recover a part of the loss of social welfare
d. There are no correct answers

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MULTIPLE CHOICE

3. Since monopoly causes damage to social welfare, the Government

should have a policy:
a. Remove monopoly
b. Control monopoly
c. A and B are wrong
d. Both A and B are correct

MULTIPLE CHOICE

4. The compensation for each unit of a good when the government

forces the natural monopoly to sell at a price ceiling equal to
marginal cost is:
a. The difference between average cost and marginal costs at the
socially optimal level of output
b. The difference between marginal cost and marginal revenue at
the socially optimal level of output
c. The difference between marginal benefit and marginal cost at
the socially optimal level of output
d. There are no correct answers

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MULTIPLE CHOICE

5. In a natural monopoly, the level of output supplied in the market

when the government sets a price ceiling equal to average cost will:
a. Less than the level of output when a price ceiling equals marginal
cost
b. Equals output when a price ceiling equals marginal cost
c. Greater than output when a price ceiling equals marginal cost
d. There are no correct answers

TRUE/FALSE
1. Since monopolies damage social welfare, the government needs to
have policies to eliminate monopolies
2. Averaging cost pricing will make the natural monopoly's excess
profit zero
3. In the natural monopoly market, setting a ceiling price equal to the
average cost of the monopolist will make the enterprise no longer
have excess profits.
4. In a market economy, monopoly always causes loss of social
welfare, so the Government should ban all cases of monopolistic
production and business.
5. The government has contradicted itself when on the one hand it
tries to fight monopoly, on the other hand, many industries exist in
the form of monopolies

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TRUE/FALSE
1. Since monopolies damage social welfare, the government needs to
have policies to eliminate monopolies
2. Averaging cost pricing will make the natural monopoly's excess
profit zero
3. In the natural monopoly market, setting a ceiling price equal to the
average cost of the monopolist will make the enterprise no longer
have excess profits.
4. In a market economy, monopoly always causes loss of social
welfare, so the Government should ban all cases of monopolistic
production and business.
5. The government has contradicted itself when on the one hand it
tries to fight monopoly, on the other hand, many industries exist in
the form of monopolies

Exercise
Exercise1. A monopolist has a demand function: P = 12-Q and a total cost
function TC = Q2.
a) What is this monopolist's profit-maximizing output level?
b) Assuming the government uses taxes to reduce social loss, if the
government imposes a tax of $2 per unit of output, what will be the
monopolist's output? Does the use of taxes reduce the loss to society
caused by monopolies? Why?
c) Assuming the government levies a total tax of T on this monopolist's
profits, what is the firm's output, and what is the firm's profit?

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Exercise
Exercise 2: Demand for a monopoly: P = 200 – 0.5Q where Q (kg) and P($)
Marginal Revenue: MR = 200 – Q
Firm with constant marginal cost: MC = 100 ($)
a) Determine the market output if there is no monopoly?
b) How much will the business sell the goods for? What is the monopoly
revenue?
c) Loss of social welfare? d) What will the government do to limit this
situation?

Exercise
Exercise 3: A monopolist has a demand curve of P = 15 – 5Q; P:
(USD/product), Q: 1,000 units
Firm has marginal revenue: MR = 15 – 10Q;
Marginal Cost : MC = 5Q + 3
a) At what output will the firm produce and at what price will it sell?
b) What is the output that society wants?
c) Does the above phenomenon cause loss of social welfare? If yes, how
much is this loss?
d) What will the government do to limit this phenomenon?

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