Question

6. If an entire industry is polluting “too much”, and it is forced to “i.t.n.e.”, what happens to the Supply, the Price, and the Quantity produced in that market, in theory?

7. What are the four “Market Structures”? Please describe each Market Structure and give an example of a firm that belongs in each of the four Market Structures, preferably a firm that was not discussed previously.

8. What is a “natural monopoly”? Please give an example.

9. Why are natural monopolies often regulated by some sort of Government Regulatory Agency? 10. In YOUR OPINION, SHOULD THE STATE OF CALIFORNIA HAVE TAKEN OVER PG&E? Why or why not?

Answer 1

Answer 6:

If a polluting industry is forced to internalize the cost of externality, then supply of the firm with pollution will decrease and as supply decrease, the price of the firm will increase and this will reduce the quantity of the product produced in that market.

Answer 7:

There are four main forms of market structure:

a. Perfect Competition - This competition is seen when firms are selling identical products in the market and there are infinite number of buyers and sellers of the product in the market and firms are price takers. This is seen in case of agricultural markets.

b. Monopoly: When there is single seller of the product in the market with no close substitute in the market there the firm has a monoply in production. This is seen in case of public transport in some countries.

c. Monopolistic Competition : When firms are competitive and are selling differentiated product in the market with hig selling cost, then there is monopolistic market. It is seen in case of smartphones, garments, autom obiles etc.

d. Oligopoly: When only a few firms are selling either identical or differentiated good with strategic behavior playing an important role, then the market structure is known as Oligopoly.Example - airlines industry.

Answer 8:

A natural monopoly exists when a single firm can satisfy the wants of entire market and that too with a falling average cost of production such that no other firms can enter the market, thennatural monopoly exists in the market.

Answer 9:

Natural monopolies often regulated by some sort of Government Regulatory Agency to prevent prices from increasing too much because of lack of competiton in the market and various entry barriers. Thus, government has to intervene to prevent exploitations of consumers by charging high prices.