Question

a) Competition is a necessary component to properly functioning markets. What happens when markets lack competition? Is this a reason for government involvement? For example, should the government have sought to break up the Microsoft Corporation?

b) How do taxes influence people's behavior? In your answer, be sure to discuss such concepts as the tax rate, tax base, and tax revenue.

Answer 1

There are number of reasons which requires to have the competition in the market for having greater efficiency. First of these reasons is the most efficient use of resources. If there are number of organizations competing with a homogenous product then it is important for each of these firms to utilize the inputs in such a manner that the production cost can be minimized. Pure competitive market has greater elasticity of demand due to many product providers. Thus if the prices are increased by a single firm then customer will switch to other firm.

Opposite to this, in case of monopolies and oligopolies, different input resources are not allocated efficiency and the prices do not match with the real values. There are some monopolies such as utility firms require huge infrastructure then in order to recover this huge cost, these firms do not charge the price where MR=MC but in fact they use straight up from that point and charge Price (P) on the demand curve. The inefficiency in this market is depicted by the distance between where MR=MC and the corresponding point on the demand curve at that quantity and thus monopolies take the advantage and charge huge prices from the customers.

This is the man reason behind the initiatives taken by the government to avoid excess price charging from the monopolies as there are no close substitute of these products and services