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C13 Economics Assignment 08 Part 1
Monopolies develop in several ways (Vandewetering, n.d.). There are “natural” monopolies that emerge from the scales of some businesses. Electric generation utilities, for example, require multi-million dollar investments in the plant and more millions to build the distribution infrastructure. At these levels of entry costs, virtually no competition can develop. Some monopolies develop around ownership of a scarce resource. The DeBeers company, for example, controls a large percentage of the world’s supply of diamonds.
The third form of monopoly is the result of government action. For example, patent and copyright protection is offered for intellectual property. Similarly, when government owns some of the infrastructure, the poles on which cable television cable is strung for example, a franchise agreement establishes a legal monopoly. In some cases monopolies can exist as direct government operations. Licensed casinos are tightly controlled and state operated liquor stores are examples of this kind of monopoly.
The situation of Futures Unlimited Corporation ("Futures") reflects a hybrid of two of these. The raw materials needed, the plutonium isotope, is under the complete control of the government through regulation. Since Futures invented the technology though, they control the intellectual property. The result is that Futures Unlimited Corporation, operating under a government license, has a complete monopoly on plutonium fueled transportation.
Futures is a “price maker” as a monopoly, unlike the “price takers” in a competitive market (Shapiro, 2003). Still, even in 2199, although many things have changed, the essential laws of supply and demand remain immutable. Futures Unlimited Corporation may have a monopoly but it cannot simply charge anything it wants to. Futures meets all of the classic definitions of a monopoly. It has complete control of a commodity for which there is no substitute. Nevertheless Futures is constrained in the prices it can charge for its commodity. As has been the case since the beginning of trade, customers can always reduce the amount they demand when prices get too high. That always reliable demand curve still slopes down, left to right, even as the 22nd Century draws to a close.
Very few commodities, goods or services have inelastic demand. Drugs, whether addictive or life preserving, are an example of an inelastic demand. Holders of patents on the drug that can cure a person’s cancer, for example, can charge literally anything and that person will pay. Government intervention is typically in the form of subsidies. There is elasticity in the demand for plutonium powered rocket cars though. While they are a convenience, there are plenty of solar powered bikes, scooters, hoverboards and other modes available.
Futures Unlmited Corporation will need to test the market. They can raise their prices incrementally until they find the point of resistance. Their profit curve is simple to determine and at the point where the marginal revenue from that next rocket car sold is less than the marginal cost of production they will have found the profit maximizing price.
This will be a price higher than would be established in a free market where total costs will always equal total revenues since in free markets producers are price takers. Futures would be able to improve profits by segmenting the market but government regulations have established this as a single-price monopoly. Rather than selling to fleets at a lower cost then, boosting revenues, Futures will sell at the same price whether 1 or 1,000,000 units are purchased.
The existence of this monopoly results in deadweight loss to society as a whole (Posner, 1974). The “excess profits” accruing to Futures reflect resources that could have gone to other uses or the purchase of other goods. In this way, the deadweight loss from monopolies is, effectively, the “opportunity cost” that they impose on society.
C13 Economics Assignment 08 Part 2
Would consumers benefit more from a tariff or a quota on imports? Provide one (1) supporting fact to support your response.
Consumers benefit from neither tariffs nor quotas. Both are devices to protect domestic industries. The very fact of a need for such protection argues that substitute goods or services are available from foreign suppliers at a lower price. Whether it is a tariff or a quota, the result of either is that consumers pay more.
Not only are consumers directly harmed by higher prices, they are harmed by a stifling of innovation. Protected industries lack the harsh judgment of a marketplace to reward superior performance or penalize poor performance. Sowell (2011) makes this point over and over when discussing why markets work and other systems do not.
A case for a “benefit” to consumers can be made for quotas and tariffs in that they do protect jobs. For example, the garment industry was protected by a series of quotas, the last of which expired in at the end of 2004 (U. S. Department of Agriculture, 2016). During the period from 1994 to 2005 as those quotas were being phased out the United States lost some 900,000 jobs in that field.
Consider the following weekly production possibilities of gloves and hats in Panama and Russia:
What is each country's opportunity cost of producing gloves and hats?
If the countries could, should they trade? Provide one (1) supporting fact to support your position.
The opportunity cost of a command economy is on display with this chart. The tiny country of Panama, population 3.657,024 in 2015 (World Fact Book, 2016) is out producing Russia, population 142,423,773 in 2015 (World Fact Book, 2016), a nation almost 50 times its size. This suggests two things in play. First, markets work (Sowell, 2011). As Sullivan (2012) reminds us, Panama has made significant strides in developing a market economy and cleaning up a corrupt government since the U.S. action of 1989. Second, the command economy of Russia has clearly established different priorities. There can be absolutely no doubt that if the commissars directed that hat and glove production increased, then the production of hats and gloves would, indeed, increase. That is the nature of command economies. That it would be an inefficient increase is equally certain, but there would be an increase and Russia could certainly outstrip the production of Panama.
Priorities set in a command economy, though, have little relationship to economics. The Russians have clearly set their priorities on re-establishing Russian dominance in much of eastern Europe. Actions in the Crimea and Ukraine in the past few years make that clear. In the face of demands for tanks the allocation of resources for other goods falls by the wayside. Quoted in Pine (2016) among others, Herman Goering, propaganda minister for Nazi Germany famously explained “Guns will make us stronger, butter will only make us fat,” giving rise to the classic production possibility curve of “guns and butter.”
Should these countries trade? Of course they should. Panama will gain currency and jobs by providing a commodity needed by the Russians, whether tank drivers in the Crimea or farmers in the Ukraine. The Russians will be able to focus yet more resources into the (committee identified) priority of increasing military strength.
The opportunity cost are simply definitional. In each country every resource devoted to producing hats or gloves (or tables or dog kennels or pogo sticks or literally anything) represents an opportunity cost in that something else will not have resources assigned to it. This is why, Sowell again, markets work and command economies do not. In a market economy all that any consumer needs to know is the small amount of information he or she needs to know to make his or her personal purchasing (resource allocation) decisions. In a command economy, whoever is in command needs to know everything. In the quote so often seen as to be unattributable, “nobody knows how to make a pencil.” As Milton Friedman put it, “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand” (Goodman, 2008).
References
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