Market Structure Analysis: Competition, Externalities, and Government

This report provides a comprehensive analysis of various market structures, including perfect competition, monopoly, oligopoly, and monopolistic competition. It delves into the key features of each structure, such as the number of sellers, product differentiation, and barriers to entry and exit. The report examines short-run and long-run profit scenarios for each market structure, considering profit maximization where marginal revenue equals marginal cost. A significant portion of the paper is dedicated to understanding negative externalities and their impact on market outcomes, with a specific focus on the case of water scarcity in the agricultural sector in India. The report also explores how the Indian government addresses these externalities through various interventions and regulations, analyzing the solutions using economic theory and graphical representations. The report concludes by comparing resource allocation efficiency across different market structures and emphasizing the role of government in mitigating market failures caused by externalities.

Running head: MARKET STRUCTURE
MARKET STRUCTURE
Name of the student
Name of the University
Author’s Note

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Table of contents
Introduction......................................................................................................................................2
Key features of different market structure.......................................................................................2
Comparison of resource allocation in diverse market structure....................................................12
Negative externalities and case of government intervention.........................................................13
Analyzing how government addresses the negative externalities existence in the market...........14
Analyzing government solution to externality problem using economic theory...........................15
Effect of externality on market outcomes of monopoly and perfect competition.........................16
Conclusion.....................................................................................................................................17
References......................................................................................................................................19

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Introduction
The objective of this paper is to analyze on the different types of market structure and its
key features. Market structure refers to the interconnected market characteristics including
competition level, product differentiation, collusion degree between buyers and sellers and firms
entry and exit. Market structure are of various types such as monopoly, oligopoly, perfect and
monopolistic competition (Mankiw, 2014). The short run and long run profit or losses in these
four market structures are also discussed in this report. The condition for profit maximization
occurs when marginal revenue (MR) becomes equal to marginal cost (MC). Further, comparison
between different resource allocation in various market structures is also discussed in this study.
The paper also highlights on the negative externalities and its impact on different market
outcome. Negative externalities are defined as the external cost that the organization suffers
owing to the outcome of economic transactions. In addition, the case study on how the
government of the respective country addresses the existence of negative externalities is also
reflected in this paper.
Key features of different market structure
Perfect competition- This market structure is also termed as ‘pure competition’ where all
the entities are price takers and have low market share. The organization in purely competitive
market sells similar commodities and has no hurdle in entry and exit. Some key features of
perfect competition are given below:
 Huge numbers of retailers and buyers- As there are infinite number of vendors and
purchaser; no individual can influence the product price.

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 Product homogeneity- Numerous entities sells similar commodities so that the
purchaser’s do not have any product preference of any retailer over others.
 No barrier in entrance and exit of entities- Firms enter and exit the competitive market
according to the business profitability.
Real life examples- The agriculture industry is one of the closest depiction of pure
competitive market. In this marketplace, the vendors sell homogenous goods including
vegetables and fruits. The commodities prices are competitive and vendors cannot influence
the pricing. In addition, the purchasers also have their preference in choosing any seller.
Monopoly- In this type of market form, the single vendor sells unique good and new
entrant’s faces barrier in entering the market (Rios et al., 2014). The retailer does not face
competition as the products have no substitute.
The features of this type of market framework are :
 One vendor and many buyers- This is imperfect form of market structure where the
buyer’s reaction cannot affect the product price, as there is only single retailer.
 No substitute product- As the product has no substitute, the monopolist has the liberty in
changing the product price.
 Huge entry barrier of the firms- The monopolist has full control over the commodities
production and sale as the new entrant faces hurdle in entering the market.
Real life example- Computer programming organizations such as Microsoft is an example of
monopoly market form. There is only one seller and their product including Visa operating
system has no substitute in the market.

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Oligopoly- Small vendors selling similar or differentiated goods characterize this market.
However, few retailers dominate this market and have full product price control.
The characteristics of Oligopoly market form are:
 Few retailers- Few entities control the market and thus enjoy full control over product
price.
 Interdependence- The firms makes pricing strategy and business decision according to
the action taken by other rivalries. Therefore, the sellers are interdependent in respect of
policies of price and output.
 Competition- Intense competition exists among the vendors as there are few players
playing in the market. Moreover, this competition benefits the buyers as firms tries to
produce good quality products at lower price.
 Entrance and exit hurdle- Entities in this market have the ability to exit the market
according to their wish but faces barriers in entering the industry (Okuguchi, and
Szidarovszky, 2012). The barriers comes in the form of government license, scale
economies.
Real life examples- Mobile, television, music organizations are few examples of oligopoly
market. These industries face huge competition from their rivalries and hence focus on the
producing innovative goods according to the prevailing market conditions.
Monopolistic competition- In this type of market, the manufacturers sells differentiated
product and are not close substitute( Rezai, 2016). The firms have no control over the goods
price and set the price charged by competitors.
Some characteristics of monopolistic competition are:

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 Huge number of purchasers and retailers- Each entity makes the pricing strategy
independently and has control over goods price.
 No barrier in firms entrance and exit- The companies enters the market when other firms
makes supernormal profit (Dunne et al., 2013). Therefore, increase in supply reduces the
product price and hence the firms existing in the market attains normal profit.
 Goods differentiation-Companies differentiate goods in order to gain competitive
advantage.
Real life examples- Restaurant and hotels business are some industries that faces monopolistic
competition.
Short run and long run profits or losses in various market structure
Monopolistic competition- Monopolistic competitive entities in short run attains profit
or faces losses by manufacturing that amount of quantity when MR=MC. When average total
cost(ATC) becomes higher than market price, loss occurs (Matsumura and Tomaru, 2012). On
the other hand, if ATC lies below equilibrium price, profit is attained. In the long run, the
competition in the industry causes each entities to attain normal profits. Moreover, the economic
profits of the companies in long run are equal to zero.

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Figure 1: Short run profit in monopolistic competition
Source: (As created by author)

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Figure 2: Short run loss in monopolistic competition
Source: (As created by author)
Figure 3: Long run profit in monopolistic competition
Source: (as created by author)
Perfect competition- The firms in pure competitive market attains economic profit in the
short run when MR> ATC and faces loss when MR<ATC. In the long run, as firms do not face
hurdle in entrance and exit, the market supply increases (Mankiw, 2014). However, all the
entities gains normal profit, as the firms attain no incentive in entering or exiting the industry.

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Figure 4: Short run profit in perfect competition
Source: (Author’s creation)

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Figure 5: Short run loss in perfect competition
Source: (As created by author)
Figure 6: Long run profit in perfect competition
Source: (Author’s creation)

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Figure 7: Long run loss in perfect competition
Source: (As created by author)
Monopoly- Monopolist do not always gains profit as the firm produces new product
according to consumer’s preferences in the short run (AR> SATC). They also accepts loss in
short run provided the firms variable cost are covered (AR<SATC). In long run, the companies
gains supernormal profit when full utilization of plant does not occur.

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Figure 8: Short run profit in monopoly
Source: (As created by author)

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Figure 9: Short run loss in monopoly
Source: (As created by author)
Oligopoly- The firms in this market attains profit when price is higher than MC and
faces loss when P<MC. In the long run, the entities economic profit becomes equal to zero.
Comparison of resource allocation in diverse market structure
Efficient resource allocation refers to the economy’s state at which the total production of
products depicts the preferences of consumers. Thus, optimal distribution of products is attained
at the point where the consumer’s marginal benefit is equivalent to the marginal costs. In pure
competitive market, resources are allocated efficiently at the point where the product price
becomes equivalent to marginal production cost (Krugman, 2013). Therefore, the firms in pure
competitive market maximize profits by manufacturing that amount where P=MC. It also benefit
the consumers as the amount purchased measured by price becomes equivalent to the economic
cost of manufacturing marginal units measured in terms of marginal cost.
On the contrary, the entities do not always manufacture at minimum cost for some market
structures including monopoly, oligopoly and monopolistic competition. However, the product
price not always becomes equivalent to the marginal cost. As the goods in monopoly market has
no substitutes that and the entity is price maker, the monopolist sets the product price to highest
level in order to attain benefit (Claver-Cortés et al., 2012). Thus, this leads to resource
misallocation. In case of monopolist market, the entities does not manufacture goods at optimum
scale and produces lower than installed capacity. Therefore, the resource malalloaction occurs
under this type of market. Similarly, the resources are misallocated in collusive or non-collusive

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oligopoly. Higher resources misallocation and resource waste in case of non-collusive oligopoly.
Thus, the organizations coddle in non-price competition.
Negative externalities and case of government intervention
Negative externality refers to the cost that third party including firms, persons or owner
of a property suffers owing to economic transaction (Rezai, et al., 2016). It is also refers to
external cost of the business. It mainly occurs in those circumstances where resource or funds
rights are not allocated and thus uncertainty occurs (Naughton, 2013). Moreover, negative
externality is the main reason behind market failure.
Figure 10: Negative externalities
Source: (As created by author)

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The figure below highlights that external cost including pollution cost from industries
creates marginal social cost (MSC) greater than marginal private cost (MPC). The output of the
goods becomes socially efficient in that situation where MSC becomes equal to marginal social
benefit (MSB) at lower output with respect to equilibrium output
Government intervention is required for aiding cost negative externality. The government
of the respective country adopts regulation or provides solutions to the market (Chen et al.,
2012). These implementation of regulations helps to recover assets for fixing damage caused due
to negative externality. In addition, these policies facilitate in putting financial price on public
cost. The data received helps the business to attain accurate number for the production cost.
Analyzing how government addresses the negative externalities existence in the market
The case study selected is on water scarcity of agricultural sector in India. Irrigation plays
a crucial role in the production of agriculture. For the past few decades, the main resource of
growth in irrigation is the ground water. In India, 70% of the total production of food grain
mainly comes from the land that is irrigated and 60% of irrigation water is attained from irrigated
area. At present, India is suffering from scarcity of ground water source due to over exploitation
of irrigation water.
Negative externality- Scarcity of water causing bad environment is deemed as negative
externalities in the production of agriculture in Indian market. Irrigation blocks that are deemed
to be overexploited are increasing at a higher rate of 5.5% annually (Bresnahan, and Levin,
2012). Therefore, water scarcity owing to depletion of water resources creates adverse effect on
agriculture production. As the people do not pay social cost for scarcity of water, the society
incurs deadweight loss in social welfare. This is shown in the figure below:

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Figure 11: Water scarcity as negative externality
Source: (As created by author)
The demand curve (DD) reflects ground water demand and the supply curve (SS1)
denotes private cost of ground water supply. The supply curve (SS) represents the social cost of
ground water supply (Bar-Isaac et al., 2012). The total quantity of water that the farmers attain is
depicted by Q1. As the farmers do not disburse payment on the social price of scarcity of water,
the society incurs deadweight loss. The area is shown by EBO.
Analyzing government solution to externality problem using economic theory
Government Initiative- Indian government adopted legal procedure that includes
domination on the methods. As the water irrigation is affected by many variables including

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political, societal, the policies implemented by the government fails to forecast the state of mind
of water users. Hence, they fail to meet the expected target.
Apart from this, Indian government takes several measures in restoring water resource
that includes harvesting rainwater, upgradation of water resource. Though the government has
taken many initiatives, these policies are not implemented on huge scale (Baldwin and Scott,
2013). The ground water development is not attributed to the policy of the government. The
decentralized farmers helps in ground water development by using natural resources in higher
amount. Thus, the farmers faces huge financial crisis due to less funding from water users.
Effect of externality on market outcomes of monopoly and perfect competition
Both the positive and negative externality influences the monopoly market in huge way.
In addition, the monopoly market reduces the consumer welfare. This reduction in consumer
welfare occurs due to lower output and this causes deadweight loss. The deadweight loss in the
monopoly market is shown below:
The monopolist manufactures that amount of quantity in which marginal revenue
becomes equivalent to marginal cost. However, when total output becomes fewer than
communally optimal, the dead-weight loss occurs (Adlakha et al., 2015). Dead-weight loss
occurs in the situation when there are price restrictions or imposition of subsidies in the market.
The deadweight loss attained from tax helps to measure the total consumer and producer lost
surplus. In addition, the deadweight loss mainly depends on the product price elasticity of supply
and demand. Therefore, if the good is less elastic , the amount traded with tax becomes equal to
amount traded without tax..

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Externalities have no effect on the market result of perfect competition. The cost or
advantage of an action does not influence the third parties (Acharya and Bisin, 2014). Therefore,
this criterion also keeps out from the government intervention. The existence of externalities
leads to failure in the market. These externalities causes resource malallocation and hence both
production or utilization becomes less of Pareto optimality. However, perfect competition do not
gain Pareto Optimality when both the social as well as private cost diverge. This is because
under this type of market the private marginal cost (PMC) becomes equal to private marginal
benefit (PMB). There is always an occurrence of allocative efficiency under perfectly
competitive market. This allocative efficiency situation occurs where price of commodities
becomes equivalent to marginal cost. Thus, it is assumed that positive as well as negative
externalities do not exist in the market (4Kirzner, 2015). Under perfectly competitive market
framework, once the government assigns property rights clearly in resources and negligible
transaction cost, the private parties that are influenced by externalities confer voluntary
agreements. Thus, this leads to social optimal allocation of resource irrespective of how rights to
property are assigned.
Conclusion
It can be concluded from the above report that, the four various type of market structure
portray features of real market. The characteristics of different market structures vary from one
another. Market framework is vital as it influences market outcomes through effect on
motivations, chance and players decision participating in this competitive market. The firms
existing in these market structures face huge competition from the other rival companies in terms
of product pricing and quality. However, they adopt certain business strategies in order to gain
competitive advantage over the rivals. Existence of externality leads to market breakdown as

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equilibrium price does not highlight true cost and advantage of commodities. Presence of
negative externality means that manufacturer does not consider all cost and hence leads to excess
production. On the contrary, in existence of positive externality the consumer dies not gain
advantage of product and this results to reduced production

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