TERM PAPER

ON
MANAGERIAL ECONOMICS

Topic: - Government Intervention & creation of Monopoly

Submitted to: Submitted by:

Mr. Ashish Sharma Bindiya Kumari

Faculty of Economics Reg no: 11005503

Sec-S1002 “A”28

 TABLE OF CONTENTS
 Acknowledgement

 Introduction

 Meaning, and Definition

 Objective of study

 Features of Monopoly

 Advantages & Disadvantages

 Government intervention on market

 Effect of government intervention on market

 Government intervention and market failure

 Literature review

 Analysis of topic

 Conclusion

 Reference

ACKNOWLEDGEMENT
First and foremost, I thank my teacher who has assigned me this term paper to bring out my
creative capabilities.

I express my gratitude to my parents for being a continuous source of encouragement and for
all their financial aid given to me.

I would like to acknowledge the assistance provided to me by the library staff of Lovely
Professional University.

My heart felt gratitude to my teacher, friends and internet services for helping me to
complete my work in time.

I take this opportunity to present my votes of thanks to all those guidepost who really

acted as lightening pillars to enlighten our way throughout this project that has led to
successful and satisfactory completion of this study.

We are really grateful to our HOD for providing us with an opportunity to undertake this
project in this university and providing us with all the facilities. We are highly thankful to
Mr. Ashish Sharma for her active support, valuable time and advice, whole-hearted
guidance, sincere cooperation and pains-taking involvement during the study and in
completing the assignment of preparing the said project within the time stipulated.

Lastly, We are thankful to all those, particularly the various friends , who have been
instrumental in creating proper, healthy and conductive environment and including new
and fresh innovative ideas for us during the project, their help, it would have been
extremely difficult for us to prepare the project in a time bound framework.

INTRODUCTION:-
In economics, a monopoly (from Greek monos  (alone or single) + polein  (to sell)) exists
when a specific individual or an enterprise has sufficient control over a particular product or
service to determine significantly the terms on which other individuals shall have access to it
monopolies are thus characterised by a lack of economic competition for
the good or service that they provide and a lack of viable substitute goods. The verb
"monopolise" refers to the process by which a firm gains persistently greater market share
than what is expected under perfect competition.

Monopoly is where one firm is the sole supplier or controls a large part of the market share.
The advantages of a monopoly are: where large scale capital is required, average costs can
fall if only one firm produce the goods. Monopolist will have better resources to spend on
research and development and will be able to bring new techniques and products to
strengthen its position. Monopoly would mean economies of scale which in turn would lead
to lower priced experts. A monopolist reacts to demand changes in a more effective manner
than other forms. Disadvantages of monopolies also exist. They charge higher prices as there
is no other competitor in the market. 

They abuse consumers in this way. Monopolist has the power to restrict market supply. It is
also argued that because there is no competition monopolist have little incentive to introduce
new products and techniques. Monopolies also restrict entries of new firms and drive them
out of business. Moreover there is lack of choice for consumers in the market. In a monopoly
firm do not respond to consumer demand. When there is competition forms supply more of
what consumers demand

OBJECTIVE :-
 To study the features, meaning and definition of monopoly
 To study the advantages & disadvantages of monopoly
 To study the role of government in the market structure
 To study how government intervention affect the market structure i.e Monopoly
  To study the different reasons of government intervention in monopoly.
 To study how the intervention of government leads to market failure i.e Monopoly.
 To study the overall impact of government intervention on Monopoly market.

FEATURES OF A MONOPOLY
 When we discuss a monopoly, or oligopoly, etc. we're discussing the market for a
particular type of product, such as toasters or DVD players. In the textbook case of a
monopoly, there is only one firm producing the good. In a real world monopoly, such
as the operating system monopoly, there is one firm that provides the overwhelming
majority of sales (Microsoft), and a handful of small companies that have little or no
impact on the dominant firm.
 Because there is only one firm (or essentially only one firm) in a monopoly, the
monopoly's firm demand curve is identical to the market demand curve, and the
monopoly firm need not consider what it’s competitors are pricing at. Thus a
monopolist will keep selling units so long as the extra amount he receives by selling
an extra unit (the marginal revenue) is greater than the additional costs he faces in
producing and selling an additional unit (the marginal cost). Thus the monopoly firm
will always set their quantity at the level where marginal cost is equal to marginal
revenue.
 Because of this lack of competition, monopoly firms will make an economic profit.
This would normally cause other firms to enter the market. For this market to remain
a monopolistic one, there must be some barrier to entry. A few common ones are:
 Legal Barriers to Entry - This is a situation where a law prevents other firms
from entering the market to sell a product. In the United States, only the USPS
can deliver first class mail, so this would be a legal barrier to entry. In many
jurisdictions alcohol can only be sold by the government run corporation,
creating a legal barrier to entry in this market.
 Patents - Patents are a subclass of legal barriers to entry, but they're important
enough to be given their own section. A patent gives the inventor of a product
a monopoly in producing and selling that product for a limited amount of time.
Pfizer, inventors of the drug Viagra, have a patent on the drug, thus Pfizer is
the only company that can produce and sell Viagra until the patent runs out.
Patents are tools that governments use to promote innovation, as companies
 should be more willing to create new products if they know they'll have
monopoly power over those products.
 Natural Barriers to Entry - In these type of monopolies, other firms cannot
enter the market because either the startup costs are too high, or the cost
structure of the market gives an advantage to the largest firm. Most public
utilities would fall into this category. Economists generally refer to these
monopolies as natural monopolies.

Disadvantages of a Monopoly
 Higher Prices
Higher Price and Lower Output than under Perfect Competition. This
leads to a decline in consumer surplus and a deadweight welfare loss

 Allocative Inefficiency.
A monopoly is allocatively inefficient because in monopoly the price is
greater than MC. P> MC. In a competitive market the price would be
lower and more consumers would benefit

 Productive Inefficiency A monopoly is productively inefficient because it is not the

lowest point on the AC curve.

 X - Inefficiency.
- It is argued that a monopoly has less incentive to cut costs because
it doesn't face competition from other firms .Therefore the AC curve is
higher than it should be.

 Supernormal Profit. A Monopolist makes Supernormal Profit Qm * (AR – AC )

leading to an unequal distribution of income.

 Higher Prices to Suppliers -

A monopoly may use its market power and pay lower prices to its
suppliers. E.g. Supermarkets have been criticised for paying low prices
to farmers.
 Diseconomies of Scale -
It is possible that if a monopoly gets too big it may experience
diseconomies of scale. - higher average costs because it gets too big 

 Worse products Lack of competition may also lead to improved product innovation.

 Charge higher prices to suppliers. Monopolies may use their supernormal profits to

charge higher prices to suppliers.
 Advantages Of Monopoly
Research and Development. Supernormal Profit can be used to fund high cost capital
investment spending. Successful research can be used for
improved products and lower costs in the long term. E.g.
Telecommunications and Pharmaceuticals.

 Economies of scale.:- Increased output will lead to a decrease in average costs of

production. These can be passed on to consumers in the form of lower
prices.

See: Economies of Scale

 International Competitiveness. :-A domestic firm may have Monopoly power in the
domestic country but face effective competition in global markets. E.g.
British Steel

 A firm may become a monopoly through being efficient and dynamic. A monopoly is
thus a sign of success not inefficiency. For example - Google

Government Intervention in the Market

 
In a free market economic system, scarce resources are allocated through the price
mechanism where the preferences and spending decisions of consumers and the supply
decisions of businesses come together to determine equilibrium prices. The free market
works through price signals. When demand is high, the potential profit from supplying to a
market rises, leading to an expansion in supply (output) to meet rising demand from
consumers. Day to day, the free market mechanism remains a tremendously powerful device
for determining how resources are allocated among competing ends.

Intervention in the market

The government may choose to intervene in the price mechanism largely on the grounds of
wanting to change the allocation of resources and achieve what they perceive to be an
improvement in economic and social welfare. All governments of every political persuasion
intervene in the economy to influence the allocation of scarce resources among competing
uses

What are the main reasons for government intervention?

 Government intervention in the market sets out to attain two goals: social
efficiency and equity. Social efficiency is achieved at the point where the
 marginal benefits to society for either production or consumption are equal to
the marginal costs of either production or consumption. Issues of equity are
difficult to judge due to the subjective assessment of what is, and what is not,
a fair distribution of resources.

 Externalities are spillover costs or benefits. Whenever there are external

costs, the market will (other things being equal) lead to a level of production
and consumption above the socially efficient level. Whenever there are
external benefits, the market will (other things being equal) lead to a level of
production and consumption below the socially efficient level.

 Public goods will be underprovided by the market. The problem is that they
have large external benefits relative to private benefits, and without
government intervention it would not be possible to prevent people having a
‘free ride’ and thereby escaping contributing to their cost of production.

 Monopoly power will (other things being equal) lead to a level of output
below the socially efficient level. It will lead to a deadweight welfare loss: a
loss of consumer plus producer surplus.

 Ignorance and uncertainty may prevent people from consuming or producing

at the levels they would otherwise choose. Information may sometimes be
provided (at a price) by the market, but it may be imperfect; in some cases it
may not be available at all.

 Markets may respond sluggishly to changes in demand and supply. The time
lags in adjustment can lead to a permanent state of disequilibrium and to
problems of instability.

 In a free market there may be inadequate provision for dependants and an

inadequate output of merit goods.

 Taxes and subsidies are one means of correcting market distortions.

Externalities can be corrected by imposing tax rates equal to the size of the
marginal external cost, and granting rates of subsidy equal to marginal
external benefits.

 Taxes and subsidies can also be used to affect monopoly price, output and
profit. Subsidies can be used to persuade a monopolist to increase output to
the competitive level. Lump-sum taxes can be used to reduce monopoly
profits without affecting price or output.
 Taxes and subsidies have the advantages of ‘internalising’ externalities and of
providing incentives to reduce external costs. On the other hand, they may be
impractical to use when different rates are required for each case, or when it
 is impossible to know the full effects of the activities that the taxes or
subsidies are being used to correct.

 An extension of property rights may allow individuals to prevent others from

imposing costs on them. This is not practical, however, when many people
are affected to a small degree, or where several people are affected but differ
in their attitudes towards what they want doing about the ‘problem’.

 Laws can be used to regulate activities that impose external costs, to regulate
monopolies and oligopolies, and to provide consumer protection. Legal
controls are often simpler and easier to operate than taxes, and are safer when
the danger is potentially great. However, they tend to be rather a blunt
weapon.

 Regulatory bodies can be set up to monitor and control activities that are
against the public interest (e.g. anti-competitive behaviour of oligopolists).
They can conduct investigations of specific cases, but these may be expensive
and time consuming, and may not be acted on by the authorities.

 The government may provide information in cases where the private sector
fails to provide an adequate level. It may also provide goods and services
directly. These could be either public goods or other goods where the
government feels that provision by the market is inadequate. The government
could also influence production in publicly owned industries.

 Government intervention in the market may lead to shortages or surpluses; it

may be based on poor information; it may be costly in terms of
administration; it may stifle incentives; it may be disruptive if government
policies change too frequently; it may not represent the majority of voters’
interests if the government is elected by a minority, or if voters did not fully
understand the issues at election time, or if the policies were not in the
government’s manifesto; it may remove certain liberties.

 By contrast, a free market leads to automatic adjustments to changes in

economic conditions; the prospect of monopoly/oligopoly profits may
stimulate risk taking and hence research and development and innovation,
and this advantage may outweigh any problems of resource misallocation;
there may still be a high degree of actual or potential competition under
monopoly and oligopoly.

 There are two views of social responsibility. The first states that it should be
of no concern to business, which would do best for society by serving the
 interests of its shareholders. Social policy should be left to politicians. The
alternative view is that business needs to consider the impact of its actions
upon society, and to take changing social and political considerations into
account when making decisions. This is good business.

 The virtue matrix is a means of illustrating the drivers of corporate social

responsibility. Firms will take socially responsible actions if they are required
to by law or if social norms dictate. These pressures on firms represent the
‘civil foundation’. Some firms will take corporate social responsibility further
and thus move into the ‘frontier’. Here they may do things that are socially
beneficial and may only possibly lead to higher profits, or may even clearly
reduce profits. As firms become more socially responsible over time and as
social pressures on business increase, so the civil foundation is likely to grow.

 Evidence suggests that economic performance is likely to be enhanced as the

corporate responsibility of firms grows.

Methods of government intervention

 Taxation

 Subsidies

 Buffer stocks

 Pollution permits

 State provision

 Regulation

 Extending property rights

Options for government intervention in markets

There are many ways in which intervention can take place – some examples are given below

Government Legislation and Regulation

The parliament passes laws that for example prohibit the sale of cigarettes to children, or ban
smoking in the workplace. The laws of competition policy act against examples of price-
fixing cartels or other forms of anti-competitive behaviour by firms within
markets. Parliament Employment laws may offer some legal protection for workers by setting
maximum working hours or by providing a price-floor in the labour market through the
setting of a minimum wage.

The economy operates with a huge and growing amount of regulation. The government
appointed regulators who can impose price controls in most of the main utilities such as
telecommunications, electricity, gas and rail transport. Free market economists criticise the
scale of regulation in the economy arguing that it creates an unnecessary burden of costs for
businesses – with a huge amount of “red tape” damaging the competitiveness of businesses.

Regulation may be used to introduce fresh competition into a market – for example breaking

up the existing monopoly power of a service provider. A good example of this is the attempt
to introduce more competition for British Telecom. This is known as market liberalisation.

Direct State Provision of Goods and Services

Because of privatization, the state-owned sector of the economy is much smaller than it was
twenty years ago. The main state-owned businesses in the UK are the Royal
Mail and Network Rail.

State funding can also be used to provide merit goods and services and public goods directly
to the population e.g. the government pays private sector firms to carry out operations for
NHS patients to reduce waiting lists or it pays private businesses to operate prisons and
maintain our road network.

Fiscal Policy Intervention

Fiscal policy can be used to alter the level of demand for different products and also
the pattern of demand within the economy.
(a) Indirect taxes can be used to raise the price of de-merit goods and products with negative
externalities designed to increase the opportunity cost of consumption and thereby reduce
consumer demand towards a socially optimal level
(b) Subsidies to consumers will lower the price of merit goods. They are designed to boost
consumption and output of products with positive externalities – remember that a subsidy
causes an increase in market supply and leads to a lower equilibrium price 
(c) Tax relief: The government may offer financial assistance such as tax credits for business
investment in research and development. Or a reduction in corporation tax (a tax on company
profits) designed to promote new capital investment and extra employment
(d) Changes to taxation and welfare payments can be used to influence the overall
distribution of income and wealth – for example higher direct tax rates on rich households or
an increase in the value of welfare benefits for the poor to make the tax and benefit system
more progressive

Intervention designed to close the information gap

Often market failure results from consumers suffering from a lack of information about the
costs and benefits of the products available in the market place. Government action can have
a role in improving information to help consumers and producers value the ‘true’ cost and/or
benefit of a good or service. Examples might include:
  Compulsory labelling on cigarette packages with health warnings to reduce smoking
 Improved nutritional information on foods to counter the risks of growing obesity
 Anti speeding television advertising to reduce road accidents and advertising
campaigns to raise awareness of the risks of drink-driving
 Advertising health screening programmes / information campaigns on the dangers of
addiction are becoming more hard-hitting in a bid to have an effect on consumers.

The effects of government intervention

One important point to bear in mind is that the effects of different forms of government
intervention in markets are never neutral – These programmes are really designed to change
the “perceived” costs and benefits of consumption for the consumer. They don’t have any
direct effect on market prices, but they seek to influence “demand” and therefore output and
consumption in the long run. Of course it is difficult to identify accurately the effects of any
single government information campaign, be it the campaign to raise awareness on the Aids
issue or to encourage people to give up smoking. Increasingly adverts financial support given
by the government to one set of producers rather than another will always create “winners
and losers”. Taxing one product more than another will similarly have different effects on
different groups of consumers.

The law of unintended consequences

Government intervention does not always work in the way in which it was intended or the
way in which economic theory predicts it should. Part of the fascination of studying
Economics is that the “law of unintended consequences” often comes into play – events can
affect a particular policy, and consumers and businesses rarely behave precisely in the way in
which the government might want! We will consider this in more detail when we
consider government failure.

Judging the effects of intervention – a useful check list

To help your evaluation of government intervention – it may be helpful to consider these

questions:

 Efficiency of a policy:  i.e. does a particular intervention lead to a better use of scarce
resources among competing ends? E.g. does it improve allocative, productive and
dynamic efficiency? For example - would introducing indirect taxes on high fat foods
be an efficient way of reducing some of the external costs linked to the growing
problem of obesity?
 Effectiveness of a policy: i.e. which government policy is most likely to meet a
specific economic or social objective?  For example which policies are likely to be
most effective in reducing road congestion? Which policies are more effective in
preventing firms from exploiting their monopoly power and damaging consumer
welfare? Evaluation can also consider which policies are likely to have an impact in
the short term when a quick response from consumers and producers is desired. And
which policies will be most cost-effective in the longer term?
 Equity effects of intervention: i.e. is a policy thought of as fair or does one group in
society gain more than another? For example it is equitable for the government to
 offer educational maintenance allowances (payments) for 16-18 year olds in low
income households to stay on in education after GCSEs? Would it be equitable for the
government to increase the top rate of income tax to 50 per cent in a bid to make the
distribution of income more equal?
 Sustainability of a policy: i.e. does a policy reduce the ability of future generations to
engage in economic activity? Inter-generational equity is an important issue in many
current policy topics for example decisions on which sources of energy we rely on in
future years.

GOVERNMENT INTERVENTION AND MARKET FAILURE

Government intervention may seek to correct for the distortions created by market failure and
to improve the efficiency in the way that markets operate

 Pollution taxes to correct for externalities 

 Taxation of monopoly profits (the Windfall Tax) 
 Regulation of oligopolies/cartel behaviour 
 Direct provision of public goods (defence) 
 Policies to introduce competition into markets (de-regulation) 
 Price controls for the recently privatised utilities

In case of monopoly

Monopoly

Few modern markets meet the stringent conditions required for a perfectly competitive
market. The existence of monopoly power is often thought to create the potential for market
failure and a need for intervention to correct for some of the welfare consequences of
monopoly power.

The classical economic case against monopoly is that

 Price is higher and output is lower under monopoly  than in a competitive

market
 This causes a net economic welfare loss of both consumer and producer surplus
 Price > marginal cost - leading to allocative inefficiency and a Pareto sub-
optimal equilibrium.
 Rent seeking behaviour by the monopolist might add to the standard costs of
monopoly. This includes high (possibly excessive) amounts of spending on
persuasive advertising and marketing.
 Libenstein's X-inefficiency may also result if the monopolist allows cost
efficiency to drop. An upward drift in costs because of a lack of effective
competition in the market-place can lead to consumers facing higher prices and
a reduction in their real standard of living
 LITERATURE REVIEW;

1.The Social Cost of Monopoly Power

Written by Brown Donald and Wood A.G 
     

Brown Donald and Wood A.G (July 2004) observed an applied general equilibrium analysis of
monopoly power is proposed as an alternative to the partial equilibrium analyses of monopoly pricing
current in antitrust economics. This analysis introduces a new notion of market equilibrium where
firms with monopoly power are cost-minimizing price-takers in competitive factor markets and make
supra competitive profits in equilibrium, i.e., the monopoly price exceeds the marginal cost of
production. 
We assume that the primary goals of antitrust policy are the promotion of competition and the
enhancement of consumer welfare. To that end, we use Debreu's coefficient of resource utilization to
determine the counterfactual competitive price levels in monopolized markets and then impute the
economic costs of monopolization.

2.The Lawful Acquisition and Exercise of Monopoly Power and its Implications

for the Objectives of Antitrust
Written by Evans S. and Hylto N.Keith

      
Evans S. and Hylton N. Keith (in 2008) observed that the antitrust laws of the United States have,
allowed firms to acquire significant market power, to charge prices that reflect that market power, and
to enjoy supra-competitive returns. This article shows that this policy, which was established by the
U.S. Congress and affirmed repeatedly by the U.S. courts, reflects a trade off between the dynamic
benefits that society realizes from allowing firms to secure significant rewards,
including monopoly profits, from making risky investments and engaging in innovation; and the static
costs that society incurs when firms with significant market power raise price and curtail output. That
trade off results in antitrust laws that allow competition in the market and for the market, even if that
rivalry results in a single firm emerging as a monopoly, but that prevent firms from engaging in
practices that go out of bounds. The antitrust laws ultimately regulate the "boundaries" of the "game of
competition." Three implications follow. First, the antitrust laws and intellectual property laws are
based on similar policy tradeoffs between static and dynamic effects. Second, the antitrust rules have,
all along, been based on this trade off and not on the effects of business practices on static consumer
welfare in relevant antitrust markets. Third, one unintended consequence of the increased role of
economics in antitrust analysis is to overemphasize static considerations which the almost the sole
focus of the economics literature that courts and competition authorities consider.

3.Competition, Consumer Welfare, and the Social Cost of Monopoly

Written by Lee Alex Ho-Yoon and Brown Donald
     
Lee Alex and Donald Brown (july2005) observed that conventional deadweight loss measures of the
social cost of monopoly ignore, among other things, the social cost of inducing competition and thus
cannot accurately capture the loss in social welfare. In this Article, we suggest an alternative method
of measuring the social cost of monopoly. Using elements of general equilibrium theory, we propose a
social cost metric where the benchmark is the Pareto optimal state of the economy that uses the least
amount of resources, consistent with consumers' utility levels in the monopolized state. If the primary
goal of antitrust policy is the enhancement of consumer welfare, then the proper benchmark is Pareto
optimality, not simply competitive markets. We discuss the implications of our approach for antitrust
law as well as how our methodology can be used in practice for allegations of monopoly power given
a history of price-demand observations.

4.Effects of Political Monopoly of the Ruling Elite on the Extent of the Market,
Income Distribution, and Development
Written by Liu Man- Wai and Yang Xiaokai

     
Liu Man-Wai and Yang Xiaokai (January2002) observed that this paper develops a general
equilibrium model to simultaneously endogenize the level of division of labour, the extent of the
market, the degree of inequality of income distribution, and aggregate productivity. It shows that good
capitalism with free markets for all goods including government services generates equal income
distribution, which entails great extent of the market. Hence, the equilibrium levels of division of labour
and aggregate productivity are high. Political monopoly by the ruling elite generates unfair relative
prices of government services to other goods and inefficient inequality of income distribution, which
results in a narrow market, thereby generating inefficient equilibrium level of division of labour and
aggregate productivity. The degree of inefficient inequality of income distribution caused by bad
capitalism is positively dependent on the degree of commoners' tolerance of unfair income distribution
inequality. This degree can be reduced by free migration between countries and competition between
different governments. As rivalry between sovereigns and free migration reduces such tolerance in a
country with political monopoly of the elite group, the equilibrium degree of inefficient inequality of
income distribution decreases. This implies attenuated rents of political monopoly. This shrink political
rent will lead to good capitalism with no political monopoly by the elite group. The story of our model is
consistent with historical phenomena documented by economic historians. This model may be used
as a working hypothesis for analyzing what is going on in the newly industrialized economies.
 5.General Equilibrium in Vertical Market Structures: Monopoly versus
Monopsony
Written by Rausser C.Gordon and Just E.Richar

      
Rausser C. Gordon and E. Richard (December 1, 2006) observed that predatory selling has been
evaluated and assessed by antitrust regulators, the courts, and the economics profession. Recently
the spotlight has turned to alleged predatory buying. The criteria for determining in output markets
whether monopolists or oligopolists are engaged in predatory actions has been debated and various
criteria have been expressed both by courts and professional economists. In the case of
monopsonists or oligopolists as buyers in input markets, many have argued that the same criteria
used to evaluate predatory selling should also hold for predatory buying. Our results demonstrate that
the widely used partial equilibrium methodology is not robust. The general or informed equilibrium
lens of this paper reveals that the partial equilibrium methodology cannot be relied upon in
assessments of monopoly or monopsony whether predatory or not. Our results show that issues in
"buy-side" monopsony matters are not simply a mirror image of issues of "sell-side" monopoly matters
when related industries or products play a role in equilibrium outcomes. In essence, once the general
equilibrium effects of market power are considered, monopoly turns out to be a far more serious
concern than monopsony.

6 . Innovation, monopolies and the poverty trap

Witten by Baland ,Jean-Marie, Francois and Patrick

Baland , Jean- Marie, Francois and Patrick observed that the an avenue by which the
structure of industries in an economy can affect the development of new technologies through
its general equilibrium impact on profits relative to wages is considered. It is shown that a
thus causing a self-perpetuating cycle. This leads to the possibility of an economy exhibiting
multiple steady states including a poverty trap or situation of zero growth. The monopolistic
structure in one industry, by increasing the share of profits in aggregate income, tends to
increase the relative profitability of innovative activities elsewhere thereby leading to
the creation of further monopoly rents which, in turn, feeds into incentives for innovation
conditions under which multiple steady states exist are analyzed, and the economy's
behaviour out of the steady state is characterized. The role of government intervention, in the
form of subsidies and direct provision of research, is also examined.

7.BUYER COLLUSION AND EFFICIENCY OF GOVERNMENT

INTERVENTION IN WHEAT MARKETS IN NORTHERN INDIA: AN
ASYMMETRIC STRUCTURAL AUCTIONS ANALYSIS
Written by Banerji A and Meenakshi V.J
Banerji A, and Meenakshi .V. J (February 2004) observed that the this article uses auction
theory to analyze wholesale markets for wheat in Northern India. This approach enables us to
characterize the market in terms of buyer asymmetries, to detect the existence of collusion,
and to quantify its impact on market prices. We show that buyer asymmetries exacerbate the
downward impact of collusion on prices. The article also considers whether the government
paid too much for the wheat it procured at the minimum support price, and shows that for our
sample it did not. The article is based on a primary survey of two wholesale markets in North
India.

8.The impact of government intervention on stock returns: Evidence from Hong

Kong
Written by Su Yuli, Yip Yewmun and Wong W Rickie

Su Yuli, Yip Yewmun and Wong W Rickie observed that the recognized barometer of the
Hong Kong stock market, to plummet from 16,673 on Aug. 7, 1997 to 6,660 on Aug. 13,
1998. The Hong Kong government attributed much of the sharp decline in the stock market to
an increase in short-selling activities by speculators and currency manipulators. In Aug. 1998,
the Hong Kong government, in an effort to restore investor confidence, purchased shares of
the 33 stocks that constitute the index. The government's action not only reverses the
declining trend of the stock market but also reduces the volatility of the market. The main
beneficiaries of the action are the shareholders of the stocks that are purchased by the
government during the intervention period, and the increase in stock prices persists.

9.The economics of prescription drug prices, government intervention, and the

importation of drugs from Canada

Openshaw S. Matthew observed that one of the more persistent discussions in the media and
political arenas has been about the increasing use of medical resources and the related rising
expense. Nightly newscasts are quick to sensationalize reports of rising health care costs: the
increase in insurance premiums, the use of more expensive diagnostic tools, the costs of long-
term care related to an aging population, and, perhaps most prominently, the high price of
prescription medications. Suggestions to control prescription drug prices include re-importing
medications from Canada or for the government to implement price-capping on expensive
pharmaceuticals. For nursing and health care leaders to make informed decisions about this
issue, it is important to understand the current role of government in health care as well as the
economic issues related to the prescription drug market. To meet that objective, the current
role of government in the health care system, the market forces involved in the prescription
drug industry, and possible outcomes from allowing the re-importation of medications from
Canada are examined.

10.Government Interventions in Health Care

Written by Donald Brik and Hong Petrick

Donald Brik and Hong Ptick observed that the although delivery of care in the United
States is usually described as a private, as opposed to a socialized health system, government
intervention pervades the health markets. Frequently, regulation and legislation are attempts
to correct what may be perceived as market failures; that is, market forces have not worked to
provide a competitive outcome in either price or the availability of resources to those in need.
To arrive at this decision, subjective ideas of a fair market outcome must be defined by
vigorous political debate. In addition to facilitating commerce, the government also
intervenes throughout many aspects of the medical system including financing, provision of
care, subsidization of medical facilities, education grants and loan forgiveness for health
professionals, and regulation of medical devices and pharmaceuticals. The government also
provides medical insurance to certain groups in the form of Medicare, Medicaid, military, and
governmental employee health plans.

ANALYSIS:-

After reading the articles we observed that

 Firms with monopoly power are cost-minimizing price-takers in competitive

factor markets and make supra competitive profits in equilibrium, i.e., the
monopoly price exceeds the marginal cost of production. 

 The antitrust laws and intellectual property laws are based on similar policy
tradeoffs between static and dynamic effects. The antitrust rules have, all
along, been based on this trade off and not on the effects of business practices
on static consumer welfare in relevant antitrust markets. Last, one unintended
consequence of the increased role of economics in antitrust analysis is to
overemphasize static considerations which the almost the sole focus of the
economics literature that courts and competition authorities consider.

 Using elements of general equilibrium theory, we propose a social cost metric

where the benchmark is the Pareto optimal state of the economy that uses the
least amount of resources, consistent with consumers' utility levels in the
monopolized state.

 The degree of inefficient inequality of income distribution caused by bad

capitalism is positively dependent on the degree of commoners' tolerance of
unfair income distribution inequality. This degree can be reduced by free
migration between countries and competition between different government.
  The general or informed equilibrium lens reveals that the partial equilibrium
methodology cannot be relied upon in assessments of monopoly or
monopsony whether predatory or not.

CONCLUSION:-
 Government aim to reduce market failure with subsidies, taxation, regulation etc.
 Intervention may increase or create market failure.
 Competition policy aims to reduce unfair competition and monopoly power.
 Public ownership is the ownership of businesses by the government
 Privatization occurs when public firms are sold to private individuals.
 Regulation is the rules and restrictions imposed by the government on the market;
deregulation is the removing of those regulations.
 Equity is the idea of fairness.
 Poverty is a problem for Indian government and they try and alleviate it with a no. of
policies including benefits, taxation, credits & minimum wages.

REFERENCE:-

BOOK PREFERRED:-

Managerial Economics

-Geetika and Piyali Ghosh (Mc Graw Hill)

Book of Modern Economic theory

-K.K Dwette.

WEBSITES:-

http://www.papers.ssrn.com/so13/result.cfm? abstract_id=568406
http://www.timpeck.blogspot.com

http:// www.en.wikipedia.org/wiki/monopoly

http://www.buzzle.com/articles/charecteristics-of-monopoly.html

http://www.econ.ohio-state.edu/ipeck/EC0501aL17

http://www.ehow.com/list5972946types-monopolies-economics.html

http://www.tutor 2u.net/economics/content/topics/monopoly/barriers to entry.html

http://www.portrailfindia.com/liberal 2.htm

http://jstor.org/pss/2584065

http://www.jstor.org/pss/2109841