Microeconomics Assignment: Market Structures and Pollution Control

This microeconomics assignment delves into various aspects of market structures and economic efficiency. The assignment explores the concepts of allocative efficiency in perfect competition and its absence in monopolistically competitive markets, analyzing the reasons behind this inefficiency. It further examines mechanisms for controlling pollution, such as property rights allocation and regulatory approaches. The assignment also includes a discussion on whether a firm should continue operating based on its price and average variable cost, as well as the point at which firms generate zero profits. Lastly, it presents a series of calculations to determine profit maximization, optimal output levels, and shutdown points under different pricing scenarios. The document includes diagrams and references to support the answers.

Micro Economics

Table of Contents
QUESTION 1...................................................................................................................................1
A. The way in which single seller within the market can maintain an inefficient allocation of
resources......................................................................................................................................1
B. Advantage and disadvantage to single seller...........................................................................2
QUESTION 2...................................................................................................................................2
A. Market structure which is used to benchmark allocative efficiency.......................................2
B. Reason and the way in which monopolistically competitive firms fail to achieve allocative
efficiency......................................................................................................................................3
QUESTION 6...................................................................................................................................4
A. Mechanisms that are used to control pollution.......................................................................4
QUESTION 7...................................................................................................................................6
A. Agreeing or not agreeing with the statement..........................................................................6
B. Agreeing or disagreeing to the statement................................................................................6
QUESTION 8...................................................................................................................................7
A...................................................................................................................................................7
B...................................................................................................................................................7
C...................................................................................................................................................8
D...................................................................................................................................................8
E...................................................................................................................................................8
F...................................................................................................................................................8
G...................................................................................................................................................8
H...................................................................................................................................................8
I....................................................................................................................................................8
REFERENCES................................................................................................................................9

QUESTION 1
A. The way in which single seller within the market can maintain an inefficient allocation of
resources
When there is only one seller in the market then it is known as monopolistic in which one
organisation rules the market. They have dominant market power as price is dominated by them
in marketplace. They set various prices by adjusting output level to attain higher profits. It is the
main reason they maintain an inefficient allocation of resources as they have all the power to
fluctuate the price and they can increase price to reduce consumer surplus. Single seller increases
rates of products as there is no other competitor in the market and customers will buy the
products whether it is costly or cheap (Ineffective allocation of resources by single seller, 2017).
The diagram below can reflect inefficient allocation appropriately:
Ill
ustration 1: Ineffective allocation of resources by single seller, 2017
(Source: Ineffective allocation of resources by single seller, 2017)
The graph above shows that when there is a single company in the market then price is
dominated by it. Q2 shows ineffective allocation of resources in which price of products is
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increased by organisation and it has resulted in decreased quantity but the percentage of both the
changes vary. Decrement is quantity demand is comparatively lower than increment in price.
B. Advantage and disadvantage to single seller
Advantage: Single seller have monopolistic market structure in which price can be
dominated by them in order to reduce consumer surplus. It helps them to enhance profitability.
As there is an absence in such type of market so firms attain higher profits.
Disadvantage: Single seller are criticised by consumers because higher price for goods is
charged by them. Due to this reason, demand and sales of their products can be reduced. Firms
that are adopting monopoly structure are known for price discrimination where different prices
are charged for same product from different customers.
QUESTION 2
A. Market structure which is used to benchmark allocative efficiency
Perfect competition market structure is used to benchmark allocative efficiency because
subnormal profits are made by all the organisations in this type of structure. As there is intense
competition in the market so business entities make sure that the price which is set by them for
products meets customer's expectation and enhance profitability. It is used to set benchmark
because in such type of structure consumers are able to choose the products or services that they
are willing to buy. When this happens, organisation which are selling desirable goods thrive and
resources moves to them. In perfect competition market structure price matches to marginal cost
of production which creates situation of allocative efficiency. The diagram below can help to
understand this concept properly:
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Illustration 2: Allocative efficiency, 2017
(Source: Allocative efficiency, 2017)
The above diagram shows that organisations meet allocative efficiency when their
marginal utility is equals to marginal cost. This situation takes place when demand and supply
intersect with each other. In above diagram marginal utility is 7 $ and marginal cost is 17 $.
Allocative efficiency can be achieved when product is sold for 11 $ (Allocative efficiency, 2017).
B. Reason and the way in which monopolistically competitive firms fail to achieve allocative
efficiency
Monopolistically firms fails to achieve allocative efficiency because price is dominated
by them and a product is always priced higher than the marginal cost of it. It is the main reason
why such types of firms are not able to attain allocative efficiency. All the organisations product
products at an output which is lower than output of minimum actual total cost. It can be achieved
when price is equals to marginal cost an din such type of structures both these elements varies
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because seller dominate prices in order to reduce consumer surplus. It can be understood with the
help of following diagram:
Illustration 3: Allocative inefficiency of Monopolistically firms, 2018
(Source: Allocative inefficiency of Monopolistically firms, 2018)
From the above graph it has been analysed that in monopolistically competitive firms
price is always higher than marginal value which affects their allocative inefficiency. It is the
main reason why they are not able to attain it because in order to achieve it, business entities are
required to match their price with marginal costs (Allocative inefficiency in monopolitically
competitive firms, 2019).
QUESTION 6
A. Mechanisms that are used to control pollution
There are various types of mechanisms that are used to control pollution as an externality.
These are described below:
Allocation of property rights to environment: Pollution in the environment takes place
due to absence of private property rights which results in market failure. In order to resolve this
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problem government can allocate property rights to environment which can helps to control
pollution. Diagram for this approach is as follows:
Illustration 4: Allocation of property rights to environment, 2019
(Source: Allocation of property rights to environment, 2019)
The above diagram is an example in which a water treatment plan and a pig farmer is
taken to understand the concept of property rights to environment. If the farmer disposes all the
waste from the pigs in to the river then it will affect the environment and also increase the cost of
water treatment plant of cleaning the river. In order to get higher marginal benefits pig farmer is
required to use own property to dispose slurry from pigs (Allocation of property rights to
environment, 2019).
Regulatory approaches: There are various types of regulatory approaches that could be
implemented by government in order to control environmental pollution. These are Performance
and design standards which includes water pollution acts, integrated pollution control licences
etc. It can be understood with the help of following diagram:
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Illustration 5: Regulatory approaches, 2019
(Source: regulatory approaches, 2019)
From the above chart it ash been identified that MACa is the position when regulatory
approaches are not implemented and the pollution unit at this stage is 20 units. MACb shows the
position when approaches are implemented and its depicts that if these are imposed by
government then pollution can be controlled (Regulatory approaches, 2019).
QUESTION 7
A. Agreeing or not agreeing with the statement
Yes investigator is agreeing to the statement that a firm should continue to operate as
long as its price is greater than its average variable cost because in this situation organisation will
be able to generate profits. When price get lower than variable cost then business entity then only
a firm should take decision regarding shutting down because in this condition company may face
huge losses. Another reason behind agreeing to this statement is that a firm should operate its
business till it generate profits by selling items. When it is not able to attain profits then only it
should take decisions of shutting down.
B. Agreeing or disagreeing to the statement
When marginal cost equals to marginal revenues and total cost equals to total revenues
then in this situation business entities generate zero profits. Investigator agrees to this statement
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because when all the costs are recovered from revenues then it is not possible for firms to
generate profits for future. This concept can be understood with the help of following diagram:
Illustration 6: Marginal cost and actual costs are equals to total and marginal revenues, 2017
(Source: Marginal cost and actual costs are equals to total and marginal revenues, 2017 )
The above diagram shows that when organisation's marginal revenues are equals to
marginal cost and total cost equals to total revenues then no profit is generated by it because all
the costs are recovered from them. In the above diagram green line reflects actual and marginal
revenues and both are equal. Blue curve is reflecting marginal cost and red one reflects actual
total cost (Marginal cost and actual costs are equals to total and marginal revenues, 2017).
QUESTION 8
A.
The firm is required to produce 70 units in order to maximise profits at a price of 8$ per
unit.
B.
Average cost of production at output of 70 units will be 6$ per unit.
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C.
Supernormal profits which will be achieved by organisation will around 310$ (8*70-
5*50).
D.
In order to maximise profits at a price of 5$ per unit organisation is required to produce
50 units.
E
If 50 units are produced by organisation then no supernormal profits will be achieved.
F.
In order to maximise profits at a price of 4$ organisation is required to produce 40 units.
G.
When 40 units are produced by organisation then it will generate profits of 20$ (40*4-
40-3.5).
H.
Below a price of 2 per unit organisation will shut down in short run.
I.
Below a price of 3.5 organisation will shut down in long run.
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REFERENCES
Online
Ineffective allocation of resources by single seller. 2017. [Online]. Available through:
<https://www.economicshelp.org/blog/glossary/allocative-efficiency/>
Allocative efficiency. 2017. [Online]. Available through:
<https://www.economicshelp.org/blog/glossary/allocative-efficiency/>
Allocative inefficiency in monopolitically competitive firms. 2019. [Online]. Available through:
<http://oer2go.org/mods/en-boundless/www.boundless.com/economics/textbooks/
boundless-economics-textbook/monopolistic-competition-12/monopolistic-competition-
75/efficiency-of-monopolistic-competition-286-12383/index.html>
Marginal cost and actual costs are equals to total and marginal revenues. 2017. [Online].
Available through:<https://courses.lumenlearning.com/boundless-economics/chapter/
production-decisions-in-perfect-competition/>
Regulatory approaches. 2019. [Online]. Available through:
<https://www.tcd.ie/Economics/staff/amtthews/FoodPolicy/LectureTopics/
Environment/Lecture20.htm>
Allocation of property rights to environment. 2019. [Online]. Available through:
<https://www.tcd.ie/Economics/staff/amtthews/FoodPolicy/LectureTopics/
Environment/Lecture20.htm>
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