Question

Consider the impact of a negative production externality in a perfectly competitive industry. The government can use a tax on production to internalise the external effect and eliminate the efficiency loss. How would the government ensure efficiency when the externality occurs in a monopoly market.(Appox 300 Words only)- Australian Economy

Answer 1

The govt.ensure efficiency when the externalitiesoccurs in a monopoly market throughregulation,taxation and subsdies and permit system.

Meaning of monopoly market- it is a market in which one company is the sole supplier.it has significant market powerie- the power to charge high prices.

Reasons for efficiency loss in monopoly market._

Following are the reasons because of which efficiency depreciate-

1- it creates a deadweightloss because the firm foregoes transactions with the consumers.

2- monopolies are less innovative and inefficient as they do not have competitors in market.thus no fear of competition leads to loss of efficiency.

3- abuse of power is also one of the cause of inefficiency in market failures.market failures occurs in monopoly because it does not have enough good available or tge price is high.

Meaning of externality- is a cost or benefit caused by a producer thai is not financially incurred or received by the producer.it can be both negative or positive

In order to ensure efficiency in monopoly market the govt.intervene market inequities tgrough regulation,taxation and subsidies.

It also intervenes to prompte general econonic fairness,maximising social welfare which includesbraking up monopolies and regulating negative externalities.the government intervene when the resources are inefficiently allocated.it also has other goals to achieve advancement and national unity.

Govt.ensure efficiency in the following ways-

Taxes- are enabled to reducethe externality and ensure efficiency.it is meant to discourage the activities that impose a net cost to 3rd party.

Subsidies- it is the money or grants given by the govt.to support a business,project or industry.eg - health care,oilsubsidies,and housing etc.it is done to make the essential items available to the public at affordable prices.it is done by the govt.to encourage consumption with positive externality.it reduces the cost of production and encourages the supplier to increase output.

Defining property rights- it limits the influenceof economic activities on unrelated parties.but its not a wise option as air and water cannot be assigned to a particular agent.

So,to sum up govt.ensure efficiency through regulations and reduces market failures and imperfection.