Microeconomics Externalities, Market Power Assignment

Introductory* Micro*economics 316-102 *Sem 1*,2010 Assignment 2 Genevieve Blanch QUESTION 1. Externalities in this situation exist where the G overnment, hoidenish or Private Organisation decides to launch a new satellite causation bes and benefits to other members of society which do not impact on the G,C or PO. Such externalities include NEGATIVE (Costs to other members of society) Hazard to the useful plowing satellites that surround Earth. Threat to our dependence for communications, broadcasting and surveillance. Debris from one opposition ca use a second, which creates still more debris and collisions.A accessiblely optimal let oncomes evanesces when then the hearty maximal benefit equals social b be(a) represent meaning the surplus to society is maximized. At the same time in effect(p) market equilibrium is needed where the private marginal benefit (PMB) equals Private marginal cost (PMC). clear rip mickle stress except run along SMC=PMC go outline pluckline SMB=PMB Q* For each active satellite a certain amount of debris is released into space. Because the debris is a hazard to other working satellites it is considered a negative externality.Due to this negative externality in production, the social cost (SMC) of producing active satellites exceeds the private cost (PMC). This means the socially desirable turn of events of active satellites, Q optimum, is smaller than the equilibrium step Q* (As seen below). Graph Debris and the social optimum retireline * drawline * SMC drawline drawline * * impairment of satellites. drawline (Demand) PMC * drawline drawline * Optimum drawline (Supply) PMB=SMB drawline Q optimum* *Q * * *Q=No. of satellites launchedWe could conclude from the article that the socially optimal outcome is not world achieved due to the negative externalities. b) The article suggests as solution*s* to achieve socially optimal amou*nt of space debris* to Create International civil satellite-awareness formation. Countri es should comply with international guidelines to minimize the amount of debris created by launches A moratorium on debris-creating anti-satellite tests Satellite launchers buying insurance. By agreeing to the policies the main aim would be to assign the externality.Meaning the satellite producers taking into account the social cost and benefits of their decisions. The first policy would work by increasing the awareness of the problem of debris in space and indeed giving an inducing for producers to think twice on a moral level before producing the satellites. If this worked the PMC would decrease in measuring to meet the optimum at SMC. The second policy would work by authoritiess implementing a task which ordain equate PMC and SMC. By putting a taxation on a certain amount of debris released through launches the SMC is forced to meet PMC, and has low cost to society.This tax should give producers of active satellites and the launches an economic incentive to reduce the amo unt of debris cosmos released into space. Another option from the second policy would be to regulate the meter of satellites existence launched or to regulate the quantity of debris being released. This could involve the government telling the producers of satellites to reduce the quantity of satellites launches or debris being released. The third policy would work by the government placing a ban on all anti-satellite tests which are heavy releasers of debris.Banning one type of satellite would reduce the overall amount of satellites launched cause the PMC to ascend the social optimum. The fourth policy would works by the insurance acting like a tax. Buying insurance acts like a tax that exit profit PMC to social optimum. . c) The free rider problem The free rider problem in the article is where the orbit is open to anyone with a launch-rocket handy, therefore some countries may improve their own well being by bearing the costs of wellbeing while leaving other countries to pay for the debris, and causing those bearing the costs to reap the benefits.The free rider problem comes from the fact that a public good is non-excludable. Its when decision makers own well being whoremonger be improved by making others pay for the good. Satellite launches are public goods because they are neither excludable nor rivalrous in consumption. People laughingstocknot be prevented from using a satellite launcher and one persons use does not reduce another persons use of it. Solutions Government supplies satellite launches. The government takes over as supplier of satellite launches.They must calculate the SMB and SMC deciding on an efficient quantity, keeping in mind the willingness to pay of satellite launch consumers. Then, using the Lindahl tax the government could finance provision of the satellite launchers by asking consumers with higher revenue to pay more. This means that consumers share of the Social marginal benefit is multiply by the cost of the launcher. (S MB x Cost=Lindahl tax). The government provides increased incentive to supply clean satellite launchers by assigning property rights. Involves assigning will power of launchers to certain suppliers who can charge other consumers for using the launchers.QUESTION 2 Relative importance of hardened costs and variable costs in the sell grocery industry? A key part of knowing how much to produce to be gainable comes from how the costs will vary with the level of production. In a large scale firm like coles and Woolworths, it is necessary to produce large quantities. The average fixed costs will decrease as the quantity produced increases. Eg. Say we are looking at labour as a fixed cost. As volume of foods produced increases, there is a diminishing marginal cost of labour as the increase in total cost that a deck ups from extra units of food produced is gradually getting smaller.If both variable costs and average costs are kept to a minimum the total cost will be most profitable. By k eeping the fixed costs pot using methods of productivity improvement such as electronic self service, the Average fixed cost will be at a minimum causing the average total cost to be at a minimum therefore cost saving. Variable costs are inevitably going to rise with the increase in quantity of changes, however with the total revenue should still outweigh the total costs if the fixed costs are kept at a minimum and the sales volume kept high. drawline ATC AVC AFC drawline Small quantity Large quantityWhy building of costs in retail grocery industry is important for understanding the profitability of firms? For large scale companies like Coles and Woolworths to be profitable the amount of fixed costs needs to balance with the sales volume. These companies are forever trying to maximize their profits a good strategy to do this is by guidance on cost savings rather than cutting costs. By cost saving, the retail grocers will invest to gain productivity, therefore becoming more effic ient and offering the customers more. Eventually in the cycle sales growth increases therefore expanding the profitability.Investing to gain productivity will bring the fixed costs down in the long run and as a result produce a smart distribution chain. If Coles/woolworths has a high fixed cost and the sale volume is decreasing, the companys profitability will be difficult to maintain hence a high fixed cost must run through large sales volume. QUESTION 3 a) Why private schools would urgency to increase school presents in response to an increase in teacher *saleries*? If we take in that subscribe for private school watchs the same but the schools costs increase we can examine what will happen to profit using MB/MC rule. drawline drawline drawline drawline $ MC $ MC drawline drawline drawline drawcustom-shape drawline drawcustom-shape drawline drawline Price * ATC* ATC drawline * * D drawline ATC D MR drawline drawline MR q q No increase in teacher salaries Increase in teacher salaries Profit equals the Price minus average total cost X the quantity. If the teachers salaries increase, this will cause the Average total cost(ATC) to increase causing the firms overall costs to increase.Therefore the profit being derived from the Price minus the newly high ATC multiplied by the quantity the total profit, will result in the school receiving less profit. By increasing the price of school fees, the increase in costs is equalised by the increase in price, therefore, with a higher price, the profit of the school will remain the same. With the impact of the economic downturn tempering fee rises Here we assume the demand will change with the impact of the economic downturn however we will assume that costs remain the same.The economic downturn will cause an inward shift in the demand curve as there is a decline in demand for private school education. The Marginal revenue will shift with the demand curve as a decrease in demand also results in a decrease in marginal r evenue. Therefore, this shift in demand will cause the price of Private civilize fees to decrease drawline drawline drawline $ MC drawline drawline drawline drawcustom-shape drawline drawline Price drawline ATC * D1* drawline ATC D2 drawline MR q QUESTION 4 Main explanations for wherefore market power of the big four banks in Australia has* increased? *Reduction in competition. * In a more competitive situation, which we hope will occur again soon, competition between the big 4 banks, smaller banks and their customers is consistent causing the prices to be competitive and the market power at a conjectural medium level. The big 4 banks have recently been less of a threat to each other mainly due to the financial crisis taking out the non-bank lenders for housing which means the larger banks have more necessity.And by taking over two smaller banks, they have reduced the smaller competition. The necessity of the banks and wish of smaller bank competition means the market power for the big four increases. *More constraint. * People are keeping with their current banks due to being high-priced and time-consuming to shift loans and bank accounts between the big four. This financial burden holds them to their banks taking the power away from the consumers and giving the banks control over market prices. Explain how the banks greater market power allows them to raise their rate of profit.Reduction in competition means that if the banks increase their prices, such as the variable mortgage rate (0. 2 percentage bucks) they will not lose customers. Because of the lack in competition the banks have heightened their market power to the point where the banks can increase their prices(mark up), without impacting on their customers. Thus, the quantity demanded for banks responds little to the price deeming it relatively price inelastic. With higher prices, the Price minus the ATC will be higher therefore raising their profit.More constraint means that other firms are le ss price competitive because their customers will be unlikely to switch banks due to it being expensive and time consuming to shift loans and bank accounts. The constraint to banks causes the consumer demand to become very price inelastic, this is because an increase in price would not sternly impact on the demand to switch to another bank because of the cost in doing so. PART 2 Why are Melbourne University Colleges significantly more expensive than other colleges when they offer similar *services? The on campus catered residential housing, otherwise known as colleges prove to show some vast discordences in fee pricing. When comparing ANUs colleges to the University of Melbournes, Melbourne proved to have significantly higher fees. To attend a Melbourne University College as an undergraduate the prices range from $18,200 to $21,051 over the year1 which can be to a $505. 55 to $584. 84 weekly fee1. At an ANU college the undergraduate weekly fee is from $297. 50(Ursula Hall) to $30 5 (Burgmann College)2.Considering they both offer similar services, food, bedrooms, amenities, gym, library, on campus, tutorial services, social and sporting events we can look to the market forces of demand and supply, as well as elasticity for an economic explanation. DEMAND The Melbourne University colleges to some(prenominal) students about to begin university are considered an essential to forming upstanding relationships as well as giving extra support academically (especially being in a whole new academic system). They offer many services from full food and board to a gym and intercollege sporting events.College is commonly referred to as the best years of your life and so many want to experience it. Most students come from regional areas and some from foreign countries, these students have the necessity to find accommodation in Melbourne so college responds to this need. Putting these aspects together we can understand why there in an increase in demand for a impersonate at a Melbourne University College (see below). drawline drawline drawline drawline P S drawline drawline drawline P*2 drawline drawline P* drawline D1 D2 Q? Q2 QConsequently an increase in demand for Melbourne Uni College results in an increase in price/fees and an increase in the quantity of places demanded. ANU Colleges offering the same or similar services and opportunities as Melbourne Uni also has a high demand to get into college, however they differ in the number of places available and the elasticity. BOTTLENECK Despite the heavy demand for a place at college there are a limited number of places available. With more people willing to get in than places, a bottleneck is placed on supply and increases the prices (similar to a firm with monopoly power).This can be represent like a quota, with the quota as the restriction on available accommodation. *Accommodation at Melbourne Uni* Colleges drawline drawline drawline P drawline S drawcustom-shape drawline drawline P Quota Melb Uni drawline drawline P*ANU drawcustom-shape drawline D drawline drawline Q*ANU Q Q Quota, Melb uni. At ANU, there is a guarantee that all interstate or regional students will be given accommodation, so the restriction on accommodation doesnt exist hence the price being lower than Melbourne Uni.Also, the price of domain of a function in Parkville, close to the city in the heart of Melbourne automatically means the price of land will be ELASTICITY The Melbourne University Colleges in some cases are filled by privileged students who come from high income families whose parents consider college a necessity, are willing to support them in college despite large fees. Other students work to be able to support themselves, both categories are relatively unaffected by the price. This means there is an inelastic demand for Melb Uni colleges.The quantity demanded of a place at Melb Uni Colleges does not respond hugely to the increase in college fees. Hence, the colleges can increase their pr ices and the demand will not be effected. Conversely, at ANU, despite the demand still being rather inelastic, it is more elastic than Melbourne Uni Colleges. ANU has a wider socio economic intake, spreading wider than Melb Uni from high income families to low income families so the quantity demanded in their colleges will more likely be swayed by pricing. Hence it is more important to maintain a competitive and lower price. drawline drawline drawline drawline drawline drawline drawline drawline drawline drawline P2 P1 drawline drawline drawline D(UM) D (ANU) drawcustom-shape drawcustom-shape Q2 Q1Q1Q2 REFERENCES http//www. colleges. unimelb. edu. au/assets/uploads/Comparative-Costs-2010. pdf University of Melbourne, ICC (2010). _Comparative Costs. _ http//accom. anu. edu. au/UAS/2340/version/1/part/4/data/ANU%20Hall%20and%20College%20Fee%20Summary%202010%20v5. pdf? branch=main&language=default Australian National University, 2010. ANU Hall and fee summary.