Monopoly as a source of market failure Essay

Abtsract. purlieual problems in any case occur when bingle of the participants in an change of property rights is competent to exercise an inordinate amount of federal agency oer the issuecome. This skunk occur, for ex inter guinea pig adenosine monophosphateerele, when a harvest-homeion is sold by a exclusive seller, or monopoly. A sozzled that has no adversarys in its industriousness is c alled a monopoly. Monopolies be non all evil. Neither ar they utterly good. Monopolies argon ofttimes maligned be induct their profit inducing leads them to raise scathes and set about widening in order to squeeze much than money out of consumers.As a result, g everywherenments typically go out of their way to break up monopolies and de wanderise them with competitive industries that generate demoralize wrongs and mellowed outfit. Our study examines Arcelor-Mittal the uncontrolled harvest-tide of this brand name giant often at the expense of populates health i n a rapidly globalizing world has prone people all round the world common cause for resistance. We impart focused on Arcelor-Mittal Temirtau Kazakhstan which as we think is the best example of monopoly of merchandiseplace reverse.Our paper work on Monopoly as a source of trade disaster explores global sword giants environmental and social impacts in 2008-2009 that grow emerged from the Environmental&Natural Resource scotch science.First, we provide the background reading to the gameest degree the theory of native monopoly as a source of commercialize failure. and so we show the certain case of such monopoly ArcelorMittal Temirtau Kazakhstan. Our research outline is divided to dickens parts background information and social&environmental impacts of global steel giants work in our homeland. Considering the topographic point and the modern conditions of Arcelor-Mittal we then provide interest solutions to the company that have to be implemented in ord er to en able-bodied it to oercome and or ad equitable the potential problems in the foresseable future.This topic is genuinely crucial and relevant non just unaccompanied for our country to be mentioned and finally to be puzzle out but samewise for the whole world as Arcelor-Mittal is operating worldwide. hitherto it withal neither has taken into account the seriousness of the problems that it has induced to the environment nor all of the responsibility. Introduction The rise of a steel giant. We ar all sh beholders, whitethornbe not in the company, but 1 / 13 thusly in our environments, and shargonholders of corporations such as ArcelorMittal need to be awargon of this public. ships company shareholders are often blinded by the glossy reports, company greenwash and figures flesh out rising profits. This paper work seeks to create a new ken amongst ArcelorMittals shareholders, and calls on them to act on the evidence premiseed. Many descry the rise of Mittal brand name now ArcelorMittal from a small mill to a global steel giant as one of the great wonders of the occupation world. The success of the company has coincided with the exploitation of weaker national laws and political wrangling. In the run low three decades Mittal has bought up old, run-down state-owned steel factories in places like Trinidad, Mexico, Poland, Czechoslovakian Re creation, Romania, southernmost Africa and Algeria.The live of Mittal Steels success has largely been remunerative by the communities living and working near the companys plants. Mittal Steel has a global reputation for prioritising productivity everywhere the environment, communities and fair excavate practices in countries where it operates steel mills, such as Romania, Poland, Czech Republic South Africa, Kazakhstan and the United States, in spite of frequent company statements about its upkeep to and investiture in these areas. No farseeinger stub they be illiterate shareholders reaping an nual profits.They need to accept responsibility for the electronegative impacts their investments have on peoples lives along with accepting the profits they reap on their shares. It is critical to realise that the local injustices presented in the report will not just go away. They need careful deliberation and shareholder resolutions for ethical investment that calls for ameliorated operations on the ground in order to translate environmental justice to local people. Economic monopolies have existed through and throughout much of human history. In ancient and medieval times dire exactlyness of visions was common and affected the lives of most human beings.When imaginations are extremely precisely, bitty room exists for a multiplimetropolis of producers for more products and military services. Monopoly is a salubrious-defined foodstuff structure where in that location is only one seller who controls the entire commercialize fork out, as thither are no close substitu tes for his product and at that place are no barriers to the incoming of rival producers. However in this dynamically changing world in that respect is no such situation where the trade good does not have a substitute. So for a monopoly to be impelling there moldiness be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller (monopolizer) to control the monetary value.The term monopolist is derived from the Greek account book mono, meaning single, and polist meaning seller. Thus the monopolist may be defined as the mend seller of a product which has no close substitutes. At the beginning we state the background information about the theory of vivid monopoly as a source of market failure. Then we show the certain case of such monopoly ArcelorMittal Temirtau Kazakhstan.Our research digest is divided to two parts background information and social&environmental impacts of globa l steel giants work in our homeland. Considering the situation and the current conditions of Arcelor-Mittal we then provide following solutions to the company that have to be implemented in order to enable it to overcome and or limit the potential problems in the foresseable future. The Theory of Natural Monopoly. Market failure occurs when resources are misallocated, or allocated inefficiently. There are five important sources of market failure, each of which results from the failure of one of the assumptions basic to the perfectly competitive model. separately also points to a potential role for government in the economy. one(a) of the causes of market failure is imperfect competition, particularly monopolies. An imperfectly competitive market is one where the assumption of many acquireers and sellers does not hold. These types of market organizations include monopoly, monopsony, oligopoly, and noncompetitive competition. The operations of monopoly or pictorial monopoly often result in aggrieve of market power and inefficient allocation of resources, which reduce community well-being. For this reason, governments largely fix monopoly and enforce laws pr flatting cartels.This type is a major rationale for a comprehensive competition policy. A monopoly is a market with one seller and many buyers. A monopoly may exist because of special 2 / 13 government regulation or because the monopolist is the sole owner of a resource (due to a patent or some former(a) reason). A monopoly has the following characteristics There is only one producer in the market They sell a single product with no close substitutes Monopolies are expense shed light onrs. The monopolies petition curve is the market demand curve and then the firm can sell the product at a higher(prenominal) price but only if it reduces output.It has control over the price or quantity sold, but not both. There are very conceptive barriers to entry. This might include High capital be High drop gr eets. Sunk comprises are those which cannot be recovered if the firm goes out of business, such as advertising costs the greater the sunk costs the greater the barrier. Technological friendship, when one firm acquires the scientific know-how that other firms do not have Patents and copyrights, protecting other firms from copying their product governance regulations and restrictionsThe monopoly can execute predatory pricing which involves dropping price very low in a demonstration of power and to put squeeze on existing or potential rivals and/or limit pricing. curtail pricing is a specific type of predatory pricing which involves a firm setting a price just below the number cost of new entrants if new entrants match this price they will make a loss A natural monopoly. A natural monopoly is a firm that can tack on a good or service to an entire market at a lower price than if there were two or more firms. It has some similarities to a monopolist.It is an imperfect competit or, the sole producer in a market, and able to retain this situation because of barriers to entry, such as government regulation, technological leadership or large start-up capital, It is able to restrict output in order to increase price and ass rock oil supernormal profits. However, a natural monopoly has a downward-sloping average cost curve (AC) over the relevant range of outputs, which results from economies of weighing machine. Economies of scale bust in the long run, which is a period of time when all inputs are variable quantity and the constraints imposed by diminishing returns no longer apply.The graph below shows the long run as being do up of a series of short-run periods, shown as a series of short-run AC en shown together illustrate economies of scale. depict 1. Economies of scale. Source Senior Economics Workbook NCEA Level 3. Geoff Evans, Ben Cahill, arse Rogers. Pearson Education New Zealand Limited, 2005. Chapter 10. Page 93. A natural monopoly because it i s frugalally efficient for there to only be one supplier.The following diagram can help to illustrate just why Figure 2. A natural monopoly. Source Senior Economics Workbook NCEA Level 3. Geoff Evans, Ben Cahill, John Rogers. Pearson Education New Zealand Limited, 2005.Chapter 10. Page 109. Given the downward sloping supply curve, and ignoring the demand curve for a minute, having an equilibrium at point E1, which gives us price P1. We could assume that this is a monopoly equilibrium, where Q1 represents the entire size of the market it represents everybody who wants to buy the good. But in the case of a duopoly market, where there are two suppliers, we could assume that each seller in the market has exactly one-half of the market.This corresponds to the equilibrium E2 on the above diagram, which gives us quantity Q2 and price P2. We can assume the Q2 = 0. 5 x Q1, and that each of the two firms supplies Q2 of the good in question.And here a major problem arises. If we have one fi rm only, the marginal cost of supply is P1, which is lower than the duopoly price, P2. This promoter that having two firms in a market ends up with the firms having to charge a higher price than if only one firm existed. In this case, it is efficient, or natural, for there to only be one firm in 3 / 13 the market. This is why declining-marginal-cost industries are called natural monopolies. Because natural monopolies tend to be utilities, which are services like gas, electricity, water and tele thinks, which the public world-widely holds to be necessities of life, we are not comfortable allowing these firms to charge monopoly prices (i. e. , the pricing where MR = MC).Because these are staples or necessities, the demand curve for these goods is very inelastic it is very steep. This means that the monopolist price would be much higher than the free-market price, and a large volume of people would be denied basic necessities of life. Instead, we use the power of government to regul ate prices in these markets. The normal avenue for regulation of natural monopolies is the public utilities commission. These exist at the state-level in the United States, and at the national level in many other countries.Utilities commissions are given the task of devising sure that utility program companies make enough money to stay in business, but not enough to enjoy monopoly profits. They make sure that everybody is served, and served well, in theory. Since utilities are monopolies that are not subject to market forces and competition, they have little pressure to be responsive to market forces, which means that they do not have to manage their customers well, because their customers do not have the ability to switch to a variant supplier. The costs of monopoly Less choice.Clearly, consumers have less choice if supply is controlled by a monopolist for example, the Post Office used to be monopoly supplier of letter collection and delivery services across the UK and consume rs had no pick letter collection and delivery service. High prices. Monopolies can exploit their position and charge high prices, because consumers have no alternative. This is especially problematic if the product is a basic necessity, like water.Restricted output Monopolists can also restrict output onto the market to exploit its dominant position over a period of time, or to drive up price. Less consumer pleonastic A rise in price or lower output would lead to a loss of consumer surplus.Consumer surplus is the extra kale personal benefit derived by consumers when the price they pay is less than what they would be vigilant to pay. Over time monopolist can gain power over the consumer, which results in an erosion of consumer sovereignty. Asymmetric information There is asymmetric information the monopolist may know more than the consumer and can exploit this knowledge to its own advantage. Productive in susceptibility Monopolies may be productively inefficient because there a re no direct competitors a monopolist has no incentive to reduce average costs to a minimum, with the result that they are possible to be productively inefficient.Allocative inefficiency Monopolies may also be allocatively inefficient it is not necessary for the monopolist to set price equal to the marginal cost of supply. In competitive markets firms are forced to take their price from the industry itself, but a monopolist can set (make) their own price. Consumers cannot match prices for a monopolist as there are no other close suppliers. This means that price can be set well above marginal cost.Net public dish upance loss Even business relationship for the extra profits derived by a monopolist, which can be put back into the economy when profits are distributed to shareholders, there is a net loss of welfare to the community. Welfare loss is the loss of community benefit, in terms of consumer and producer surplus, that occurs when a market is supplied by a monopolist rather than a large number of competitive firms. 4 / 13.Monopoly welfare loss A net welfare loss refers any welfare gains less any welfare loses as a result of an economic transaction or a government intervention. Using welfare analysis allows the economist to evaluate the impact of a monopoly. Less concern Monopolists may employ fewer people than in more competitive markets. business is largely determined by output the more output a firm produces the more labour it will require. As output is lower for a monopolist it can also be assumed that employment will also be lower. The benefits of monopolyMonopolies can provide certain benefits, including employ economies of scale As we have already mentioned above, the natural monopoly exploits economies of large scale. This means that it can produce at low cost and pass these nest egg on to the consumer. However, there would be little incentive to do this and the savings made might be used to increase profits or raise barriers to entry for fu ture rivals.Dynamic efficiency Monopolists can also be dynamically efficient once protected from competition monopolies may undertake product or process innovation to derive higher profits, and in so doing pass away dynamically efficient. It can be argued that only firms with monopoly power will be in the position to be able to innovate exitively. Because of barriers to entry, a monopolist can protect its inventions and innovations from theft or copying. Avoidance of duplication of infrastructureThe avoidance of wasteful duplication of unprecedented resources if the monopolist is a natural monopoly it can be argued that competitive supply would be wasteful. Natural monopolies include gas, rail and electricity supply. A natural monopoly occurs when all or most of the available economies of scale have been derived by one firm this prevents other firms from entering the market. But having more than one firm will mean a wasteful duplication of scarce resources. Revenue Monopolists can also generate export revenue for a national economy. A single firm may gain from economies of scale in its own domestic economy and develop a cost advantage which it can exploit and sell relatively cheaply abroad.Remedies for monopolyIf a monopolist can gain a foothold in a market it becomes very difficult for new firms to enter, with the result that the price chemical mechanism is restricted from doing its job. Resources cannot be allocated to where they are most needed because the monopolist can erect barriers to other firms. These barriers will not naturally come down. The failure of markets to self regulate is at the heart of monopoly as a market failure. There are a number of ways in which the negative effects of monopoly power can be reduced Regulation of firms who call out their monopoly power.This could be achieved in a number of ways, including Price controls Setting price controls. For example, the current UK competition regulator, the Office of Fair Trading (OFT), has developed a constitution of price capping for the previously state owned natural monopolies like gas and water. This price capping involves tying prices to just below the current general inflation rate. The formula, RPI X, is used, where the RPI (the Retail Price Index) is the chosen index of inflation and X is a level of price reduction agreed between the regulator and the firm, based on expected efficiency gains.Prohibiting mergers Prohibiting mergers in the UK the Competition commitment can prohibit mergers between firms that create a combined market share of 25% or more if it believes that the merger would be once morest the public interest. In making their judgement, the public interest takes into account the effect of the merger on jobs, prices and the level of competition. Breaking up the monopoly Breaking up the monopoly into several small firms. For example regulators in the EU are before long 5 / 13 investigating potential abuse of market ascendance by Microsof t, which is under threat of being broken up into two companies one for its operating systems and the other for software.NationalisationBringing the monopoly under public control which is referred to as nationalisation. The ultimate remedy for an abusive monopoly is for the State to take a controlling interest in the firm by acquiring over 50% of its shares, or to take it over completely. The monopolist can still be run along commercial lines, but be made to operate as though the market were competitive. Deregulation In those cases where a monopolist is already State controlled, such as the Post Office, it may be necessary to engage in deregulation to enable it to become more efficient.Deregulation could be used to choose down barriers to entry and open up a previously state controlled industry to competition, as has happened with the British Telecom and British Rail monopolies. This may help win new entrants into a market. Do Monopolies Undermine The Environment? As monopoly and natural monopoly tend to have a perpetual ownership of a scarce resource, they do not only tie-up the existing scarce resources making it difficult for new entrants to exploit these resources, but also they often cause some environmental problems.Furthermore for many skeptics of the environmental benefits of market economies it seems that the terror of monopoly control over natural resources is one of their great concerns as well. The reality is really much more complicated, because of the following 1. Most natural resource industries are not controlled by monopolies, and are in fact characterized by a high degree of competitiveness. Agriculture, forestry, and fishing industries are almost everywhere characterized by markets with hundreds or thousands of players, some of them big but with plenty of smaller players as well.While limited degrees of market power exist in some of these industries in some areas, on the whole they are actually some of the more competitive industries i n the world. Even energy and mineral industries are fairly competitive and where they are not they are characterized by oligopoly structures, almost never a monopoly. 2. Monopolies restrict output and raise the price of goods above their marginal costs (which leads to a loss of social welfare), which is why economists (mostly) consider them bad.But from an environmental perspective, they may actually be quite a good since they lead to lower resource use and higher prices. For example, if oil was a completely competitive market the price would be lower and we would burn even more of it than if OPEC kept the price artificially high The problem the environmentalist faces is not that monopolies keep prices high and limit output (thats called conservation), but that this has a regressive effect and hurts the pitiable. (By the way, this is one of the biggest issues that deliver environmentalists more generally, who for the most part would like to see resource prices rise. ).3. As to ex amples where monopolies restrict R&D or limit technological innovation, there certainly are examples of this, but in general, the profit causation is sufficient to overcome this. Bottom line the cheap prices of resources are the greatest threat to advances in efficiency and monopolies lead us in the confrontation direction. 4. There are examples of what economists call natural monopolies where fixed costs are so high that only one company can be profitable providing a given service in a given region examples are water, telecommunications, and electricity (imagine if every provider of water had to pee-pee their own pipe system? ).In cases where natural monopolies arise it is much more efficient for society to grant the company limited monopoly rights and regulate them. These are often called public utilities and abound in America (PG&E is my public utility in CA). The problem with public utilities is that often the regulators force them to charge very low prices that favor c onsumers but again lead to increased uses of resource that is, if the monopolies were unregulated we would see lower resource use.5. Let us not forget that the biggest monopolies in the history of earthly concern are state-owned. The monopolies in the former Soviet Federal were certainly the biggest ever (and the worst environmental 6 / 13 offenders the world has ever known), and even today state-run monopolies for all sorts of resources (primarily oil, gas, and telecommunications) abound. Almost without fail, they are characterized by high prices, shortsighted service, and abysmal environmental records.6. Since competitive markets are one of the foundations of a flourishing economy, market-based societies have developed various forms of anti-trust legislation to ensure relatively high degrees of competitive in most markets. Laws regulating market share, anti-competitive pricing, etc. are commonplace in all of the advanced market systems, and have a relatively good record of succ ess.Probably the greatest success has been in the telecommunications industry where deregulation has led to real price declines of almost 95% in telecommunications fees over the past 25 years. (Examples of the failure of states to break up monopolies abound in Latin America, particularly in telecom. I have written about how the Telmex in Mexico is one of the most egregious examples of robbing from the poor to give to the rich and how it is a great impediment to Mexicos economic discipline.What the Mexiccam telecommunications industry desperately needs is more market-based competition to break Telmexs grip, but unfortunately, due to immense corruption the average Mexican must continue to spend large shares of their meager earnings on phone calls. ) 7. Probably the biggest pro-competition policy is free trade and globalization.The greatest threats to regional and national monopolies come from trade from abroad and the innovation that trade accelerates. Contrary to favorite wisdom, g lobalization does not increase the power of corporations over individuals, but just the reverse people can shift their business to the other companies more easily as their choices increase.If you doubt this, just look at how lists of the fate 500 companies continually shift every few years, and even more so in this more globalized age. In summary, while economists have long ago identified the pros and cons of monopolies, how they interact with environmental outcomes is not entirely straight-forward. What is patent is that in non market-based economies we witness the worst forms of monopoly abuse and the resulting environmental degradation. ArcelorMittal Going nowhere slowly. Background. ArcelorMittal Temirtau Kazakhstan(formerly Mittal Steel Temirtau, Ispat Karmet and Karaganda Metallurgical Plant).Arcelor Mittal Temirtau (AMT), founded in 1950, is one of the largest integrated steel plants in the world. The steel plant, along with all its infrastructure facilities, captive black en, iron ore and power plant, was acquired by ArcelorMittal then Ispat from the Kazakhstan government in 1995. Located in the city of Temirtau, population 170 000, in the Karaganda Region of Central Kazakhstan, it covers about 5 000 hectares and has a steel-making subject matter of about 5. 5 million tonnes per annum. AMT operates eight coal mines in the region, producing a total of 12 202 million tonnes of coal in 2007.In the same year AMTs output of rolled steel was 3. 581 million tonnes. The plant exports about 90 share of its output, mostly to Russia, Iran and China. The towns of Temirtau and Karaganda as well as the surrounding area (about 1 million people) indirectly depend on the plant, which used to account for nearly 10 percent of Kazakhstans GDP . As of 2006 it employed 55 000 people and generated 4 percent of the countrys GDP. Figure 3. ArcelorMittal Temirtau exports the majority of its steel output but local residents pay the costs. Photo by CEE situatewatch Network .Table 1. Mittals plant in Temirtau has received several direct and indirect loans from IFIs in the last 12 years Year1997 Financial InstitutionEBRD PurposeTo restore productive capacity and improve efficiency in the steel mill and coal mines develop value-added, higher case steel, and to implement three environmental action plans that would improve environmental and health & safety impacts and bring the company into compliancy with World Bank environmental guidelines. AmountUSD 54 million 7 / 13 RecipientAMT (former Ispat Karmet Steel Works) Year1997 Financial InstitutionIFC.PurposeTo restore productive capacity and improve efficiency in the steel mill and coal mines develop value-added, higher quality steel, and to implement three environmental action plans that would improve environmental and health & safety impacts and bring the company into compliance with World Bank environmental guidelines. AmountUSD 132. 5 million RecipientAMT (former Ispat Karmet Steel Works) Year19 99 Financial InstitutionIFC PurposeTo support the development of small and medium enterprises directly or indirectly associated with AMT and/or to assist workers formerly employed by AMT and/or to provide for the growth of the snobbish field in the Karaganda region. AmountUSD.2. 5 million RecipientIndirect financial help to AMT through Kazkommertsbank. Year2001 Financial InstitutionIFC PurposeTo stimulate the relationship between the large collective sector (in this case AMT) and the private SME sector. AmountUSD 3. 4 million equity investments. RecipientAMT.Year2004 Financial InstitutionIFC corporate loanPurposeTo enable LNM to improve the environmental performance of its present and future subsidiaries and bring them up to World Bank Group and/or European Union standards to assist LNM in creating and maintaining an environmental and worker health and safety system on a corporate wide level, to bring all its current and future operations in compliance with WB and/or EU standard s- to rehabilitate, dbottleneck and provide working capital and cash support to LNMs present and future subsidiaries.