Monopoly as a source of market failure Essay

Abtsr meet. Environmental problems excessively occur when one of the participants in an exchange of property rights is able to rub d ingest up an inordinate amount of agency everyplace the out make do. This brook occur, for ex adeninele, when a yield is sold by a single seller, or monopoly. A unshakable that has no competitors in its industry is called a monopoly. Monopolies argon not all evil. Neither be they utterly superb. Monopolies atomic number 18 much maligned be ca-ca their profit incentive antecedes them to raise termss and get off issue in grade to squeeze much money out of consumers.As a resolving power, governments typically go out of their way to break up monopolies and replace them with agonistical industries that generate lower prices and full(prenominal)er(prenominal) output. Our study examines Arcelor-Mittal the un viewled growth of this steel giant often at the expense of peoples health in a rapidly globalizing worldly concern has stipulation people all around the world common cause for resistance. We obligate focused on Arcelor-Mittal Temirtau Kazakhstan which as we think is the best example of monopoly of commercialise failure.Our paper work on Monopoly as a informant of market failure explores global steel giants environmental and social impacts in 2008-2009 that abide emerged from the Environmental&Natural Resource political preservation.First, we provide the reason germinatement about the theory of instinctive monopoly as a source of market failure. Then we army the certain case of such monopoly ArcelorMittal Temirtau Kazakhstan. Our research analysis is divided to ii parts fend forground information and social&environmental impacts of global steel giants work in our homeland. Considering the location and the current conditions of Arcelor-Mittal we then provide chase solutions to the alliance that take up to be weaponed in order to enable it to overcome and or delineate the strength proble ms in the foresseable future.This topic is very crucial and germane(predicate) not just still for our country to be mentioned and finally to be solved only when also for the whole world as Arcelor-Mittal is operating worldwide. However it still neither has learnn into account the earnestness of the problems that it has induced to the environment nor all of the responsibility. Introduction The rise of a steel giant. We are all shareowners, possibly not in the corporation, besides 1 / 13 indeed in our environments, and shareholders of corporations such as ArcelorMittal fatality to be aware of this originality.Company shareholders are often blinded by the g outlety reports, company greenwash and figures expound rising profits. This paper work seeks to create a new awareness amongst ArcelorMittals shareholders, and calls on them to act on the evidence displayed. Many perceive the rise of Mittal brand now ArcelorMittal from a small mess about to a global steel giant as one of the great wonders of the business world. The success of the company has coincided with the exploitation of weaker case laws and political wrangling. In the last three decades Mittal has bought up old, run-down state-owned steel factories in places homogeneous Trinidad, Mexico, Poland, Czech Republic, Romania, southeastward Africa and Algeria.The represent of Mittal Steels success has largely been paid by the communities living and working near the companys plants. Mittal Steel has a global reputation for prioritising productiveness over the environment, communities and fair labour practices in countries where it operates steel mills, such as Romania, Poland, Czech Republic South Africa, Kazakhstan and the United States, in spite of frequent company statements about its attention to and investment in these areas. No spaciouser crapper they be uninformed shareholders reaping annual profits.They need to accept responsibility for the negative impacts their investments have on peoples lives along with accepting the profits they reap on their shares. It is critical to understand that the local injustices presented in the report will not just go away. They need careful deliberation and shareholder resolutions for ethical investment that calls for modifyd operations on the ground in order to deliver environmental justice to local people. Economic monopolies have lasted throughout much of human history. In ancient and medieval times dire scarcity of resources was common and affected the lives of closely human beings.When resources are extremely scarce, pocket-sized room live ons for a multiplicity of producers for many products and military service of processs. Monopoly is a well-defined market structure where there is just now one seller who controls the spotless market tack, as there are no cockeyed substitutes for his product and there are no barriers to the launch of rival producers. However in this dynamically changing world there is no s uch situation where the commodity does not have a substitute. So for a monopoly to be effective there must be no practical substitutes for the product or service sold, and no serious threat of the admission of a competitor into the market. This enables the seller ( monopoliser) to control the price.The bound monopoliser is derived from the Greek word mono, meaning single, and polist meaning seller. Thus the monopolist whitethorn be defined as the sole seller of a product which has no close substitutes. At the beginning we state the background information about the theory of inwrought monopoly as a source of market failure. Then we show the certain case of such monopoly ArcelorMittal Temirtau Kazakhstan.Our research analysis is divided to two parts background information and social&environmental impacts of global steel giants work in our homeland. Considering the situation and the current conditions of Arcelor-Mittal we then provide following solutions to the company that h ave to be implemented in order to enable it to overcome and or limit the potential problems in the foresseable future. The system of Natural Monopoly. Market failure occurs when resources are misallocated, or allocated in cost-effectively. There are five important sources of market failure, each of which results from the failure of one of the assumptions basic to the perfectly competitive model.Each also points to a potential role for government in the economy. One of the causes of market failure is imperfect competition, particularly monopolies. An imperfectly competitive market is one where the assumption of many buyers and sellers does not hold. These types of market organizations include monopoly, monopsony, oligopoly, and monopolistic competition. The operations of monopoly or intrinsic monopoly often result in misuse of market power and inefficient allocation of resources, which condense community welfare. For this reason, governments generally puzzle monopoly and en essen ce laws preventing cartels.This type is a major rationale for a schoolwide competition policy. A monopoly is a market with one seller and many buyers. A monopoly may exist because of special 2 / 13 government regulation or because the monopolist is the sole owner of a resource ( ascribable to a patent or few otherwise reason). A monopoly has the following characteristics There is however one producer in the market They sell a single product with no close substitutes Monopolies are price admitrs. The monopolies select curve is the market demand curve therefore the rigid abide sell the product at a higher price but only if it reduces output.It has control over the price or quantity sold, but not both. There are very strong barriers to entry. This qualification include High capital hail High sunk costs. Sunk costs are those which brush offnot be recovered if the firm goes out of business, such as advertising costs the greater the sunk costs the greater the barrier. Technol ogical knowledge, when one firm acquires the technological know-how that other firms do not have Patents and copyrights, protect other firms from copying their product Government regulations and restrictionsThe monopoly can execute esurient pricing which involves dropping price very low in a demonstration of power and to put pres surely on actual or potential rivals and/or limit pricing. Limit pricing is a specific type of predatory pricing which involves a firm setting a price just below the average cost of new entrants if new entrants match this price they will make a leaving A natural monopoly. A natural monopoly is a firm that can supply a good or service to an entire market at a lower price than if there were two or to a greater extent firms. It has some similarities to a monopolist.It is an imperfect competitor, the sole producer in a market, and able to retain this positioning because of barriers to entry, such as government regulation, technological leadership or large start-up capital, It is able to restrict output in order to increase price and earn supernormal profits. However, a natural monopoly has a descending(prenominal) average cost curve (AC) over the relevant range of outputs, which results from economies of scale. Economies of scale develop in the long run, which is a period of time when all inputs are variable and the constraints imposed by diminishing returns no longer apply.The graph below shows the long run as being made up of a series of short-run periods, shown as a series of short-run AC en shown together bedeck economies of scale. Figure 1. Economies of scale. Source Senior Economics Workbook NCEA Level 3. Geoff Evans, Ben Cahill, John Rogers. Pearson Education New Zealand Limited, 2005. Chapter 10. Page 93. A natural monopoly because it is economically efficient for there to only be one supplier.The following diagram can help to illustrate just why Figure 2. A natural monopoly. Source Senior Economics Workbook NCEA Level 3. G eoff Evans, Ben Cahill, John Rogers. Pearson Education New Zealand Limited, 2005.Chapter 10. Page 109. Given the downward sloping supply curve, and ignoring the demand curve for a minute, having an equilibrium at point E1, which gives us price P1. We could assume that this is a monopoly equilibrium, where Q1 represents the entire size of the market it represents everybody who wants to buy the good. But in the case of a duopoly market, where there are two suppliers, we could assume that each seller in the market has exactly half of the market.This corresponds to the equilibrium E2 on the in a higher place diagram, which gives us quantity Q2 and price P2. We can assume the Q2 = 0. 5 x Q1, and that each of the two firms supplies Q2 of the good in question.And here a major problem arises. If we have one firm only, the marginal cost of supply is P1, which is lower than the duopoly price, P2. This core that having two firms in a market ends up with the firms having to charge a higher p rice than if only one firm existed. In this case, it is efficient, or natural, for there to only be one firm in 3 / 13 the market. This is why declining-marginal-cost industries are called natural monopolies. Because natural monopolies tend to be utilities, which are services like gas, electricity, pissing and telephones, which the public generally holds to be necessities of life, we are not comfortable allowing these firms to charge monopoly prices (i. e. , the pricing where MR = MC).Because these are staples or necessities, the demand curve for these goods is very springless it is very steep. This means that the monopolist price would be much higher than the free-market price, and a large quite a little of people would be denied basic necessities of life. Instead, we use the power of government to regulate prices in these markets. The normal bridle-path for regulation of natural monopolies is the public utilities commission. These exist at the state- take aim in the United St ates, and at the national level in many other countries.Utilities commissions are given the task of making sure that utility companies make enough money to stay in business, but not enough to enjoy monopoly profits. They make sure that everybody is served, and served well, in theory. Since utilities are monopolies that are not subject to market forces and competition, they have little pressure to be responsive to market forces, which means that they do not have to treat their customers well, because their customers do not have the ability to switch to a different supplier. The costs of monopoly Less choice.Clearly, consumers have less choice if supply is controlled by a monopolist for example, the Post Office used to be monopoly supplier of letter army and delivery services across the UK and consumers had no alternative letter collection and delivery service. High prices. Monopolies can exploit their position and charge high prices, because consumers have no alternative. This is e specially problematic if the product is a basic necessity, like water.Restricted output Monopolists can also restrict output onto the market to exploit its dominant position over a period of time, or to drive up price. Less consumer unornamented A rise in price or lower output would lead to a button of consumer surplus.Consumer surplus is the extra plunder private benefit derived by consumers when the price they pay is less than what they would be prepared to pay. Over time monopolist can gain power over the consumer, which results in an corrosion of consumer sovereignty. Asymmetric information There is asymmetric information the monopolist may know to a greater extent than the consumer and can exploit this knowledge to its own advantage. Productive inefficiency Monopolies may be productively inefficient because there are no direct competitors a monopolist has no incentive to reduce average costs to a minimum, with the result that they are likely to be productively inefficient .Allocative inefficiency Monopolies may also be allocatively inefficient it is not necessary for the monopolist to set price equal to the marginal cost of supply. In competitive markets firms are forced to take their price from the industry itself, but a monopolist can set (make) their own price. Consumers cannot compare prices for a monopolist as there are no other close suppliers. This means that price can be set well supra marginal cost.Net welfare loss Even accounting for the extra profits derived by a monopolist, which can be put back into the economy when profits are distributed to shareholders, there is a net loss of welfare to the community. Welfare loss is the loss of community benefit, in terms of consumer and producer surplus, that occurs when a market is supplied by a monopolist rather than a large number of competitive firms. 4 / 13.Monopoly welfare loss A net welfare loss refers any welfare gains less any welfare loses as a result of an economic transaction or a gover nment intervention. Using welfare analysis allows the economist to mensurate the impact of a monopoly. Less employment Monopolists may employ fewer people than in more than competitive markets.Employment is largely determined by output the more output a firm produces the more labour it will require. As output is lower for a monopolist it can also be assumed that employment will also be lower. The benefits of monopolyMonopolies can provide certain benefits, including action economies of scale As we have already mentioned above, the natural monopoly exploits economies of large scale. This means that it can produce at low cost and pass these savings on to the consumer. However, there would be little incentive to do this and the savings made might be used to increase profits or raise barriers to entry for future rivals.Dynamic efficiency Monopolists can also be dynamically efficient once saved from competition monopolies may undertake product or process innovation to derive higher profits, and in so doing become dynamically efficient. It can be argued that only firms with monopoly power will be in the position to be able to innovate effectively. Because of barriers to entry, a monopolist can protect its inventions and innovations from theft or copying. Avoidance of duplication of infrastructureThe avoidance of inefficient duplication of scarce resources if the monopolist is a natural monopoly it can be argued that competitive supply would be wasteful. Natural monopolies include gas, rail and electricity supply. A natural monopoly occurs when all or most of the available economies of scale have been derived by one firm this prevents other firms from entering the market. But having more than one firm will mean a wasteful duplication of scarce resources. Revenue Monopolists can also generate export revenue for a national economy. A single firm may gain from economies of scale in its own domestic economy and develop a cost advantage which it can exploit and se ll relatively cheaply abroad.Remedies for monopolyIf a monopolist can gain a foothold in a market it becomes very effortful for new firms to enter, with the result that the price mechanism is restricted from doing its job. Resources cannot be allocated to where they are most needed because the monopolist can erect barriers to other firms. These barriers will not naturally come down. The failure of markets to self regulate is at the heart of monopoly as a market failure. There are a number of ways in which the negative effects of monopoly power can be reduced Regulation of firms who abuse their monopoly power.This could be achieved in a number of ways, including scathe controls Setting price controls. For example, the current UK competition regulator, the Office of honorable Trading (OFT), has demonstrable a system of price capping for the previously state owned natural monopolies like gas and water. This price capping involves tying prices to just below the current general inf lation rate. The formula, RPI X, is used, where the RPI (the Retail Price Index) is the chosen index of inflation and X is a level of price reduction agreed amongst the regulator and the firm, based on expected efficiency gains.Prohibiting unifications Prohibiting unions in the UK the Competition Commission can command mergers between firms that create a combined market share of 25% or more if it believes that the merger would be against the public interest. In making their judgement, the public interest takes into account the effect of the merger on jobs, prices and the level of competition. Breaking up the monopoly Breaking up the monopoly into some(prenominal) smaller firms. For example regulators in the EU are currently 5 / 13 investigating potential abuse of market agency by Microsoft, which is under threat of being broken up into two companies one for its operating systems and the other for software.NationalisationBringing the monopoly under public control which is r eferred to as nationalisation. The ultimate remedy for an abusive monopoly is for the State to take a controlling interest in the firm by acquiring over 50% of its shares, or to take it over completely. The monopolist can still be run along commercial lines, but be made to operate as though the market were competitive. Deregulation In those cases where a monopolist is already State controlled, such as the Post Office, it may be necessary to engage in deregulation to enable it to become more efficient.Deregulation could be used to bring down barriers to entry and open up a previously state controlled industry to competition, as has happened with the British Telecom and British Rail monopolies. This may help encourage new entrants into a market. Do Monopolies Undermine The Environment? As monopoly and natural monopoly tend to have a perpetual ownership of a scarce resource, they do not only tie-up the existing scarce resources making it difficult for new entrants to exploit these reso urces, but also they often cause some environmental problems.Furthermore for many skeptics of the environmental benefits of market economies it seems that the fear of monopoly control over natural resources is one of their greatest concerns as well. The reality is actually much more complicated, because of the following 1. Most natural resource industries are not controlled by monopolies, and are in fact characterized by a high degree of competitiveness. Agriculture, forestry, and fishing industries are almost everywhere characterized by markets with hundreds or thousands of players, some of them big but with plenty of smaller players as well.While limited degrees of market power exist in some of these industries in some areas, on the whole they are actually some of the more competitive industries in the world. Even energy and mineral industries are fairly competitive and where they are not they are characterized by oligopoly structures, almost never a monopoly. 2. Monopolies restri ct output and raise the price of goods above their marginal costs (which leads to a loss of social welfare), which is why economists ( more often than not) consider them bad.But from an environmental perspective, they may actually be quite good since they lead to lower resource use and higher prices. For example, if crude oil was a completely competitive market the price would be lower and we would burn even more of it than if OPEC kept the price artificially high The problem the environmentalist faces is not that monopolies keep prices high and limit output (thats called conservation), but that this has a regressive effect and hurts the poor. (By the way, this is one of the biggest issues that confront environmentalists more generally, who for the most part would like to see resource prices rise. ).3. As to examples where monopolies restrict R&D or limit technological innovation, there certainly are examples of this, but in general, the profit motive is suitable to overcome th is. Bottom line the cheap prices of resources are the greatest threat to advances in efficiency and monopolies lead us in the opposite direction. 4. There are examples of what economists call natural monopolies where fixed costs are so high that only one company can be profitable providing a given service in a given region examples are water, telecommunications, and electricity (imagine if every provider of water had to build their own pipe system? ).In cases where natural monopolies arise it is much more efficient for society to grant the company limited monopoly rights and regulate them. These are often called public utilities and abound in America (PG&E is my public utility in CA). The problem with public utilities is that often the regulators force them to charge very low prices that favor consumers but again lead to increased uses of resource that is, if the monopolies were unregulated we would see lower resource use.5. Let us not forget that the biggest monopolies in the hi story of benignity are state-owned. The monopolies in the former Soviet Union were certainly the biggest ever (and the worst environmental 6 / 13 offenders the world has ever known), and even today state-run monopolies for all sorts of resources (primarily oil, gas, and telecommunications) abound. Almost without fail, they are characterized by high prices, poor service, and abysmal environmental records.6. Since competitive markets are one of the foundations of a prosperous economy, market-based societies have developed various forms of anti-trust legislation to ensure relatively high degrees of competitive in most markets. Laws regulating market share, anti-competitive pricing, etc. are commonplace in all of the advanced market systems, and have a relatively good record of success.Probably the greatest success has been in the telecommunications industry where deregulation has led to real price declines of almost 95% in telecommunications fees over the past 25 courses. (Examples o f the failure of states to break up monopolies abound in Latin America, particularly in telecom. I have written about how the Telmex in Mexico is one of the most egregious examples of robbing from the poor to give to the rich and how it is a great impediment to Mexicos economic development.What the Mexiccam telecommunications industry desperately needs is more market-based competition to break Telmexs grip, but unfortunately, due to immense corruption the average Mexican must continue to spend large shares of their meager moolah on phone calls. ) 7. Probably the biggest pro-competition policy is free trade and globalization.The greatest threats to regional and national monopolies come from trade from abroad and the innovation that trade accelerates. Contrary to popular wisdom, globalization does not increase the power of corporations over individuals, but just the reverse people can gaucherie their business to the other companies more easily as their choices increase.If you doubt this, just look at how lists of the Fortune 500 companies continually shift every few years, and even more so in this more globalized age. In summary, while economists have long ago identified the pros and cons of monopolies, how they interact with environmental outcomes is not entirely straight-forward. What is obvious is that in non market-based economies we bump the worst forms of monopoly abuse and the resulting environmental degradation. ArcelorMittal Going nowhere slowly. Background. ArcelorMittal Temirtau Kazakhstan(formerly Mittal Steel Temirtau, Ispat Karmet and Karaganda Metallurgical Plant).Arcelor Mittal Temirtau (AMT), founded in 1950, is one of the largest unified steel plants in the world. The steel plant, along with all its infrastructure facilities, captive sear, iron ore and power plant, was acquired by ArcelorMittal then Ispat from the Kazakhstan government in 1995. Located in the city of Temirtau, population 170 000, in the Karaganda realm of Central Kazakh stan, it covers about 5 000 hectares and has a steel-making readiness of about 5. 5 million tonnes per annum. AMT operates eight coal mines in the region, producing a total of 12 202 million tonnes of coal in 2007.In the same year AMTs output of rolled steel was 3. 581 million tonnes. The plant exports about 90 percent of its output, mostly to Russia, Iran and China. The towns of Temirtau and Karaganda as well as the surrounding area (about 1 million people) indirectly depend on the plant, which used to account for nearly 10 percent of Kazakhstans GDP . As of 2006 it employed 55 000 people and generated 4 percent of the countrys GDP. Figure 3. ArcelorMittal Temirtau exports the majority of its steel output but local residents pay the costs. Photo by CEE Bankwatch Network.Table 1. Mittals plant in Temirtau has received several direct and indirect loans from IFIs in the last 12 years Year1997 financial InstitutionEBRD PurposeTo restore productive capacity and improve efficiency in t he steel mill and coal mines develop value-added, higher quality steel, and to implement three environmental action plans that would improve environmental and health & safety impacts and bring the company into obligingness with World Bank environmental guidelines. AmountUSD 54 million 7 / 13 RecipientAMT (former Ispat Karmet Steel Works) Year1997 Financial InstitutionIFC.PurposeTo restore productive capacity and improve efficiency in the steel mill and coal mines develop value-added, higher quality steel, and to implement three environmental action plans that would improve environmental and health & safety impacts and bring the company into compliance with World Bank environmental guidelines. AmountUSD 132. 5 million RecipientAMT (former Ispat Karmet Steel Works) Year1999 Financial InstitutionIFC PurposeTo support the development of small and medium enterprises directly or indirectly associated with AMT and/or to support workers formerly employed by AMT and/or to provide for the growth of the private sector in the Karaganda region. AmountUSD.2. 5 million RecipientIndirect financial help to AMT through Kazkommertsbank. Year2001 Financial InstitutionIFC PurposeTo stimulate the relationship between the large collective sector (in this case AMT) and the private SME sector. AmountUSD 3. 4 million equity investments. RecipientAMT.Year2004 Financial InstitutionIFC corporate loanPurposeTo enable LNM to improve the environmental performance of its present and future subsidiaries and bring them up to World Bank Group and/or European Union standards to assist LNM in creating and maintaining an environmental and worker health and safety system on a corporate wide level, to bring all its current and future operations in compliance with WB and/or EU standards- to rehabilitate, dbottleneck and provide working capital and cash support to LNMs present and future subsidiaries.