Market Mechanisms for Controlling Pollution

Running head: ASIGNMENT 1
ECONOMICS ASSIGNMENT
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ASSIGNMENT 2
Question1
a. “Illustrate and explain using diagrams how a single seller within the market can maintain
an inefficient allocation of resources”
A market which consists of only one single seller is said to be a monopoly. A single seller
in the market can maintain an inefficient allocation of resources by setting prices high in the
market and minimizing production (Askar, 2013). This means that less output is produced and
higher prices are charged in order to maximize prices as shown in the diagram below.
From the diagram, it is evident that the single seller maintains an inefficient allocation of
resources by producing at a point where marginal revenue equals the marginal cost. This leads to
reduced quantity in the market Q1 which is sold at higher price P1 which is greater than the
marginal cost. This results in deadweight loss which consists of both the loss in consumer
surplus and the loss in producer surplus as shown in the diagram above (Amir et al, 2016). For

ASSIGNMENT 3
efficiency to occur in the market, the single seller should produce goods and services at the
equilibrium point E0 which is the lowest point of the average cost curve. At this point, more
quantity Q0 is produced and lower price P0 which is equal to the marginal cost is charged.
b. “Are there any advantages to a single market seller and how do they compare to its
perceived disadvantages”
The single seller in the market is likely to enjoy various advantages as explained.
The single seller will have the benefit of enjoying economies of scale (Foster,
McChesney & Jonna, 2011). This will enable the seller to increase productivity and reduce costs
of production. Customers can as well benefit from the reduced production costs through lower
prices.
The single seller has the ability to fund research and development. Supernormal profits
obtained can be used to fund research and development projects and hence improve the quality
of goods and services (Chen & Schwartz, 2013).
The single seller has the advantage of making supernormal profits. There is no
competition in the market and prices are set high up above the marginal cost to maximize profits.
Customers also have no choice rather than to purchase from the seller and hence the seller has
complete dominance of the market share.
However, there are various advantages associated with this situation of a single seller as
explained.

ASSIGNMENT 4
Consumer choice is reduced as the single seller offers a low output in the market in order
to maximize profit. Production is done at a point where the marginal cost and revenue are equal
and not at the efficient equilibrium point.
Consumers are charged a higher price which is more than the marginal costs. This
happens as the seller’s desire is to reap a supernormal profit.
Due to the lack of competition in the market, the seller may be complacent and hence sell
low-quality products and offer poor services to customers at higher unreasonable prices.
The seller may practice price discrimination and hence customers may be dissatisfied as
similar goods and services are sold to them at different prices (Aguirre, Cowan & Vickers,
2010).
In comparing the merits and demerits of the single seller, the demerits outdo the merits.
Hence, the single seller may end up being inefficient economically in the long run and this will
highly disadvantage consumers in the market. Therefore the powers of single selling should be
minimized by introducing competing firms in the market for the seller to be productively and
allocatively efficient.
Question2
a. “What market structure is used to benchmark allocative efficiency and why do we use it?
Illustrate and explain using a diagram”
Perfect competition market structure is the one which is used in benchmarking allocative
efficiency. Allocative efficiency in the context of production refers to a situation whereby goods
and services are maximally distributed considering the preferences of consumers (Holmes, Hsu