Question

Carefully explain why the following structures of production are inefficient and how the New Institutional Economic approach to (and explanation of) that inefficiency varies from the neoclassical approach.
(a) A monopoly;
(b) Externalities in production.

Answer 1

Before inefficient production structure of :

1. Monopolies- production is said to be efficient when with the given input ,the output is maximised but they are ALLOCATIVELY INEFFICIENT i.e. as they charge too high price which is not right at the societial level and as there prices for products will be high ,thereafter many a times the scares resources are bound to be under utilizes.
2. Externalities in Production - these basically grow as the property rights are not well managed i.e. the agents tend to consume and its cost is covered by unrelated party. These are unintended ,and the consequences of same are often regarded as unrelated and unsolicited.

New Institutional Economic approach :

Here neoclassical are the believers that consumption,pricing and production can be interpreted from demand and supply function however New Institutional Economic approach has tend to be a step forward to neo Classical as it includes many such aspects missed in neo classical and also study on classical political economy

1. Monopoly- it believes that monopolies can survive and will ultimately fail, as there is trade off between organizational scale and sensitivity to failure ,showing power can't be permanent, which has been derived from anti trust law and managerial science
2. Externality in production - it also comes from anti trust laws saying there can be negative externalities for outside parties i.e. for consumer as it can be by reducing Competition, however her positive means it's economising , also including the price mechanism as negative will increase the price and will make it inefficient.

Conclusion

The New Institutional Economic approach is an boroader extension given to economics ,with regards to neo classical's horizon