Microeconomics

Question 1

Natural monopolies will make economic loss if the regulators force them to produce goods and services where marginal costs and marginal revenue are equal. The regulator finds it difficult to set the price at level equals to marginal cost for natural monopolies due to this problem, despite high inefficiency and prices among many natural monopolies (McEachern, 2012). If they set a break-even price, the output levels fall below the social optimal level. This makes it difficult for natural monopolies to allocate their resources efficiently without exploiting the consumers.

Question 2

Political corruption occurs when government officials use their offices in order to achieve illegitimate benefits. It may include nepotism, bribery, extortion, graft, patronage among other forms. Political corruption increases the cost of doing business in a country since one has to pay illegal payments to government officials. It also affects negatively the quality of government services due to embezzlement of funds failure to comply with the law. In addition, it increases the spending of a government. Bureaus offer services to the public without intention to make profit since governments own them. On the other hand, business firms provide goods and services to the public with intention to make profit.

Question 3

Private goods are both rivalrous and excludable. They are only available for those people who are willing to pay. On the other hand, public goods are non-rivalrous and non-excludable in nature. The government through its agencies normally provides them. In many cases, public goods are basic needs such as education, health services, and water that are not left in the hands of private firms due to the risk of exploitation of the public. Natural monopoly goods are excludable but non-rivalrous in nature (McEachern, 2012). Finally, open access goods are free to anyone and hence competitive in nature. Governments regulate them to ensure that they give benefits to all members of the society.

Question 4

Natural monopolies are the only ones producing and selling a particular product in the market. Therefore, they tend to abuse their position by charging high prices or offering inefficient services to their customers. It is difficult to regulate natural monopolies because they are sole owners and seller of a given product in the market (McEachern, 2012). Although the Sherman Act was meant to prohibit monopolies, it led to the elimination of competition in the market. Lack of competition in the market reduced profitability that hindered the implementation of the act in many industries.

Question 5

Market power is the ability of a firm to influence the price of goods or services in the market. Firms that have market power can raise the prices of their goods or services even without losing their customers to their rivals. They also have ability to control the quantity of goods that will be sold in a particular market. Such firms are ‘price makers’ and dictate the price of a particular good or services in the market.

Case study 1

1. Although there are many consumers of milk and other agricultural products in the US, subsiding these products will have harmful effects on the economy in general. This is because the government will have to pay millions of tax payers’ money in order to subsidize the price of milk. Secondly, subsidizing these products will reduce competition in the agricultural sector since the law of demand and supply will not be operating (Kirwan, 2009). Finally, subsidies will reduce food prices in other parts of the world, which will have retrogressive effects to the developing economies.

2. a. Agricultural subsidies lead to overproduction of food products, which consequently reduces their prices. Low profitability in the agricultural sector forces many people to convert their land for housing development. Increased shift into housing development lowers housing prices as many farmers build rental houses in their land that they previously used for agriculture.

b. Agricultural subsidies reduces technological change in the sector since low food prices reduces farming profitability. Investors are not willing to introduce new technology in the sector since it is not profitable enough to compensate for the cost for the research and development.

c. Agricultural subsidies lowers the price dairy products substitutes since as their demand decrease the price of food products goes down. For instance, the demand for coffee decreases as the price of milk goes down.

Case study 2

Campaign finance reforms may have opposite effects in a number of ways. First, the policy will increase the chances of the incumbents to be re-elected since they will take advantage of the states’ resources that are at their disposal. Decreasing the supply of campaign funds will affect new challengers negatively since they require more money to publicize their agenda compared to the incumbents (Ensley, 2009). Secondly, limiting campaign funding will minimize political competition since ‘good politicians’ may not have enough money to carry out their campaign activities. Increased campaign spending comes with increased competition that leads to the election of good leaders. Low competition due to limited campaign funds will have retrogressive effects to the development of the country. Finally, the policy may eliminate the contribution of the interest groups in the political process, which is crucial in making efficient decisions. Interest groups play a lobbying role in the public decision-making, which ensure policy makers make balanced decisions.

 

References

Ensley, M. (2009). Individual campaign contribution and candidate ideology. Public choice, 138, 229-238.

Kirwan, B. (2009). The incidence of U.S agricultural subsidies on farmland rental rates. Journal of political economies, 117, 138-164.

McEachern, W.A. (2012). Economic regulation and antitrust policy. New York, NY: Cengage learning. 1-42.