Since Microsoft enjoys monopolistic power in the PC operating system maeket, can it set as high a price as it likes for its internet browser? In what way do you think that microsoft might be inefficient?

Microsoft enjoys monopolistic power in the PC market but it cannot overprice its internet browser even there are not close competitor so they are described as a price maker.

The difference between a competitive firm and a monopoly is the monopoly's ability to influence the price of the output. A competitive firm is small relative to the market in which it operates and therefore takes the price of its output as given by market conditions. By contrast, because a monopoly is the sole producer in its market, it can alter the price of its good by adjusting the quantity it supplies to the market. The demand curve of a competitive firm is a horizontal line as they can sell as much or as little as it wants at this price. In effect, because the competitive firm sells a product with many substitutes, the demand curve is perfectly elastic. However, a monopoly demand curve is a negative gradient curve as if the monopolist raises the price of its good, consumers buy less of it.

A monopoly charge price that exceeds marginal cost. The marginal cost of selling extra copy of internet explorer is only a few dollars(cost of making 1 more cd) where the market price of windows in many times the marginal cost. It is perhaps not surprising that monopolies charge high price for their products and customers of monopolies might seem to have little choice but to pay whatever the monopoly charge. But even so, microsoft cannot sell the internet explorer cd at $500 or even $5000 as if microsoft set the price too high, fewer people would buy the product. This is because fewer people will buy computers, switch to other operating systems or browser such as firefox or even make illegal copies if the price is set too high.Hence, monopolies such as microsoft cannot achieve any level of profit they want because high price reduce the amount that their customers buy. Although monopolies can control the prices of their goods their profits are not unlimited.

A competitive market use the invisible hand of the maeket and this leads to an allocation of resources that makes total surplus as large as it can be. Because a monopoly leads to an allocation of resources different from that in a competitive market, it fail to maximise the total economic well being. The socially efficient quantity is found where the demand curve and marginal cost curve intersect. Monopoliset choose to produce and sell the quantity of output at which the marginal revenue and marginal cost curves intersect. They will choose the quantity at which the demand and marginal cost curves intersect so monopolist produces less than the socially efficient quantity of output which result in deadweight loss. Therefore, microsoft monopoly is inefficient.

(reference: principles of economics by Mankiw)

Labels: Monopoly

From The Economist:

Using economic analysis, explain why the Singapore government is increasing its spending on Research and Development (R&D).

R&D is whereby a firm researches to develop new products of higher quality. Other firms will thus, benefit from the improvements of these new products, enjoying lower costs from higher efficiencies (this is an external benefit). This would mean that the all firms (both those that do R&D and don't) would benefit the same since the improvements of technology would be the same. This is why Marginal Social Benefit (MSB) is equals to Marginal Private Benefit (MPB). However, since the firms that undertake R&D have to use more resources to research and develop while the firms that don't undetake R&D don't have to use any resources, the Marginal Private Cost (MPC) would be larger than the Marginal Social Cost (MSC). Hence, the divergence in the cost curves. Since firms are unwilling to undertake R&D due to its high costs and that firms are able to wait for other firms to develop, there will be less firms undertaking R&D, resulting in an underproduction of research activities. Hence, R&D activities are an external benefit in production.
The graph above shows that MPC is greater than MSC. The point at which the firms maximise profits is when MPC is equals to MPB, which is at E1. The firms are thus producing an output of OQ1. This is smaller than the socially efficient output of OQ2where MSB is equals to MSC. There is thus an underproduction of Q1Q2 and it results in a welfare loss of the area E1E2X. This unequal allocation of resources is thus, a market failure.

The Singapore government is spending more on R&D so that producers would be given an incentive to increase R&D projects. The increase in spendings by the Singapore government will shift the S1 curve towards the right, making the output that is produced closer to the socially efficient output. This reduces the welfare loss and the area E1E2X will become smaller. Thus, the government is increasing its spending on R&D projects.

Suggest reasons why the government has increased R&D expenditure gradually.

Well, if the government increased R&D expenditure too quickly, there may be a presence of over-subsidies and even more firms would undertake R&D. This could result in the overproduction of R&D, resulting in another market failure. By increasing the R&D gradually, slowly but surely, the government would be able to obtain the socially efficient output and correct this market failure. The exact expenditure that should be spent on R&D is very difficult to monetize, thus it is better to be safe than sorry. :D

Responding to Jun Hao's answer...

R&D is not a public good because the firms that do not undertake R&D will also have to pay for the new and improved products to use them. This means that R&D is excludable and only those who have the money to pay for it will be able to use it. Thus, it is not a public good. However, if the firms do not have to pay for these new products and if every single firm will be able to use these products, then it can be considered as a public good since it would be non-excludable and non-rivalrous. So yeah . . .

Hurry and finish your PIs guys !
MINGYI :D

Labels: Merit, Research and Development

Using economic analysis, explain why the Singapore governement is increasing its spending on Reasearch and Development (R&D).

R&D generates external benefits in production. It can be considered a public good as it is non-excludable (assuming there is no patent filed or firms wait for patents to expire, on average 20 years later, before using the technology) and non-rivalrous. Public goods face the free rider problem which results in a missing market because producers are unwilling to supply the good as consumers can choose not to pay for it, based on the assumption that consumers are rational beings. (Very much applicable to Singaporeans who love all things free, why pay if it is not compulsory?)

Many private firms do not undertake R&D due to the free rider problem, they would rather wait for other firms to spend money to develop better technologies then 'steal' their newly developed technology. Our government realised that less R&D is taking place so they increased funding for firms to undertake R&D because R&D has external benefits in production so successful R&D would increase productive efficiency of not just one but many firms and bring more revenue to Singapore whereas without R&D our economy would remain stagnant. The government's main duty is to look after welfare of Singaporeans and by promoting R&D it is indirectly fulfilling its responsibility.

Suggest reasons why the government has increased R&D expenditure gradually.

Because... haste makes waste... Another reason is that the government wants to establish a stable R&D sector first before it is willing to pump more money into it. This is just my opinion.

Jun Hao

ADDENDUM:

Just to add a bit to JunHao's excellent answer: Another reason why the government may be slow in increasing the amount of R&D spending is because of the indeterminate nature of the payoff. We all know that R&D produces a positive externality, but what we don't know is the magnitude of this external benefit. Furthermore, not all R&D would yield a definite benefit; some research never produce any fruits at all. This only further muddles the situation. If the government subsidises too much, it may risk an over-allocation of resources, which is equally undesirable to society as an under-allocation of resources toward R&D. Hence, the government may want to increase expenditure at a gradual pace to ensure no over-subsidising occurs.

Also, the money from the subsidies would have to come from — you guessed it — taxpayers. To fund the subsidies the government must increase the amount of tax, which creates a disincentive for people to work and invest. This would, of course, have an adverse effect on economic growth. In order to circumvent this problem, the government hence gradually increases the expenditure of subsidies as this would allow more time for the money needed to be collected without a sharp spike in tax rates.

~Nicky(:

Labels: Merit, Research and Development

Market failure in housing
The housing sector does not always operate in an optimum way. Indeed there are many economists who believe that the housing sector is a good example of numerous market failures - we examine this in this section.

Possible causes of market failure in the housing sector:

Homelessness:
Measuring the true scale of homelessness in the United Kingdom is extremely difficult. The Shelter web site provides some evidence on how many people are classified as homeless. Homelessness is the most acute indicator of housing shortage. In 1999 a total of 166,760 households were recognised as homeless by local authorities in England. This represents over 400,000 people. This figure is only the tip of the iceberg. It does not include most of the 41,000 people who are living in hostels and squats, or the 78,000 couples or lone parents sharing accommodation, as they are unable to afford to set up a home on their own. People from minority ethnic groups are over represented among homeless households. In 1998, 59 per cent of households accepted as homeless by local authorities in inner London were from ethnic minorities. The Government estimates that at June 1999 around 1,600 people were sleeping on the street on any one night. In 1999, Shelterline, received 38,000 calls from single homeless people. Most single people have no priority under the current homelessness legislation. Low level of housing also contributes to social exclusion and growing levels of crime and vandalism which is a negative externality.

Poor Quality Housing - Inequality and Negative Externalities

The poor quality of much of the UK housing stock inevitably has an effect on the standard of living and quality of life of many thousands of people. There is growing evidence that poor housing contributes to a decline in average life expectancy and increased incidence of illness. This imposes extra costs on the National Health Service and Social Services. To these external costs we can add the impact of poor housing conditions on the educational attainment level of hundreds of thousands of school children.

Market Failure and Inefficiency in Housing Transactions

The system of home buying and selling in England and Wales is one of the slowest in Europe, it causes misery and frustration for many home buyers and sellers, and it leads to many transactions falling through after an offer has been made. Previous research has shown that it takes around eight weeks to get from offer acceptance to exchange of contracts, that 40 per cent of both buyers and sellers are dissatisfied with the process, and that 28 per cent of offers fail after acceptance

Thus as above we can see that the market has failed as there is a underallocation of resources. Housing is a merit good and thus there is always under consumption of the goods. Thus government have to step in to help in increasing their consumption. Firstly, the British Government can provide subsidies for building houses but however this has been quite low in recent years. This will in bid that with a lower production cost, supply of the houses will increase thus causing a surplus which will lower the price. The lowered price will then attract people to purchase a house which will in the end solve the market failure. However, it will bear alot of burden on the government expenses, and in order to fund the operation they would have to increase taxes which has detrimental impact on the economy and the society.

Another way that can be done is throught setting a price floor. The aim of this is to reduce the price of rented houses, however this could result in a shortage of houses in the rented sector and the degradation of the quality of the rented houses as there is not much profitability from rental of the houses.

Freddy

On quasi-public goods

As we all know (or should know) by now, public goods are goods that exhibit the qualities of non-rivalry and non-excludability while private goods are both rivalrous and excludable. When a good exhibits only one of these two traits, it is referred to as quasi-public good.

However, quasi-public goods can be further subdivided into two more categories, namely common goods and club goods.

When a good is excludable but non-rival, it is a club good. This means that while some people can be excluded from the consumption of the good, one person's consumption of it does not diminish another person's ability to do so (at least until the point of congestion is reached). Examples of this are computer software, cable television, movies in cinemas and access to patented or copyrighted ideas. Club goods are a form of natural monopoly (which, unfortunately, will not be discussed in this post).

When a good is rivalrous but non-excludable, it is a common good. While the consumption of such a good prevents another person from simultaneously doing so, there is largely no way of excluding people from consuming these goods. Such goods usually come in the form of renewable resources, e.g. fish, forests and water.

In the case of common goods, self-interested individuals often deplete resources to secure short-term gains without regard for the long-term consequences (e.g. over-fishing). This situation is known as the tragedy of the commons. When the consumption of these goods are regulated by a governmental entity for the sake of sustainability, the tragedy of the commons is circumvented. Common goods that are sustained in this manner are referred to as common-pool resources.



~Nicky(:

Labels: Public

Why the Singapore governement is increasing its spending on Research and Development (R&D).

When research and development (R&D) is done, it creates a kind of positive externality known variously as a knowledge spillover or technology spillover. The technological advances made by a firm's R&D has an impact on other firms' productive efficiency and helps improve their profitability.

Society is able to gain from the positive externality caused by R&D in the private sector because the knowledge gained from the R&D is non-rivalrous. Since one of the government's roles is to maximize the welfare of society, it would want to encourage R&D in industries that yield large spillovers such as the biomedical science industry. The Singapore government does this through methods such as offering special tax breaks for expenditures on R&D and even outright subsidies for certain industries with large spillovers. This form of governmental intervention in the economy is called industrial policy.

If the government decides to use subsidies, tax breaks and other forms of industrial policy to encourage R&D, the supply curve would shift rightward equal to the amount of the reduction in the cost of production due to the policies. To ensure that the market equilibrium is at the social optimum, the shift in the supply curve caused by the governmental intervention should equal the value of the spillover.

Firms may apply for patents to grant them property rights to their breakthroughs for a limited period of time in which no other firms are able to benefit, hence giving firms more incentive to engage in R&D. This would cause a rightward shift in the private cost curve and cancel out the positive externality caused by the R&D. However, society will still benefit in the long run as when the patents eventually expire the breakthroughs will become non-excludable knowledge that can be used freely by other firms.


Above: A supply-and-demand diagram illustrating the positive externality of R&D. Note that the private cost > social cost.

A potential stumbling block for industrial policy is the indeterminate nature of the size of the spillovers from different markets, i.e. it is impossible if not extremely difficult to accurately predict the magnitude of the positive externality caused by R&D. Without accurate information about the benefits of the R&D of the various industries, the government is unable to determine the amount of subsidies and/or tax breaks to give out and may even cause a negative externality if the amount given is too great.

In conclusion, Singapore is increasing its spending on R&D because doing so would maximize the welfare of society as R&D has a large spillover effect that is beneficial to the industrial development of the country.

~Nicky(:

Labels: Research and Development

Hi, Here is my answer to question 3:

Suggest alternative measures other than banning the use of plastic bags.

I agree with Zhen Qiang's suggestion of putting more resources into R&D for biodegradable plastic bags. However, the development of these plastic bags are still in the early stage and the use of these bags are rather costly, so people tend to stick with the use of original plastic bags which are much more cheaper.

Thus, this are some suggestion of what we can do now as an alternative method:

1. The supermarkets can increase the number of BYOB day to once a week rather than once a month. This will help more people to remember which day to bring your own bag as it is required more offen. Thus, this will cut down on the use of plastic bags.
2. The supermarket can also train their staffs to put more items into a single plastic bag. Currently, the cashiers are only puting a few items in each bag and not filling them up to their maximun capacity. Thus, if they fill up each plastic bag with more items, they can cut down on the use of plastic bags.

The reduction in use of plastic bag will bring the MPB curve closer to the MSC curve, thus reducing the amount of negative externalities. For the meantime, before there is use of biodegradable plastic bags, we should all learn to reduce, reuse and recycle.

Kwok Cheung

• Solutions to Market failure done by the government. (Taxes/Subsidies, Legislation)
• The governement aims to enusure MSB=MPB and MSC=MPC, such that there would be no welfare loss (Economic Efficiency is attained).

• Information Failure arises when consumers do not get the right information or lack of relevant information. In other words, ignorance.
• Merit goods are goods that are underconsumed (education, healthcare)
• Demerit goods are goods that are overconsumed (junk food, drugs)
• Both results in divergence in the benefit curves.
• Solutions include taxes/subsidies, legislation, education.

• Asymmetric Information occurs when one party has more information than the other concerning the transaction. (Insurance)
• Adverse selection is a transaction between 2 people with different amount of information.

New Questions:

1. Using economic analysis, explain why the Singapore governement is increasing its spending on Reasearch and Development (R&D).
2. Suggest reasons why the government has increased R&D expenditure gradually.

Bouns Question:

Describe the trend in the Private Sector Expenditure on R&D from 2000 to 2007.

Figure 1 : Gross Expenditure on R&D (GERD) and Private Sector Expenditure on R&D (BERD), 2000-2007

Source: http://www.a-star.edu.sg/a_star/189-Press-Release?iid=607

http://www.straitstimes.com/Breaking+News/Singapore/Story/STIStory_291903.html

Study hard for the upcoming CE this friday! (:

Zhen Qiang

An Oxo-biodegradable plastic bag

On the bag, it writes: ' This is an Oxo-biodegradable plastic bag. This bag will start to degrade in less than a year once it reaches landfill. Meanwhile, thank you for reusing this bag and doing your part for the environment.'

Zhen Qiang

Most of the problems associated with plastic bags are negative externalities of consumption.

A large plastic bag externality is how to dispose of them once they are used. Plastic bags can be recycled into other plastic bags; however, this is rarely the case Most plastic bags are not recycled instead they wind up in landfills, in the ocean, or even as litter.

The plastic bags that end up in landfills take up valuable landfill space. A typical landfill costs more than twenty million dollars to build and millions more per year in order to maintain. Nearly all of this money comes from taxpayers. Eventually the landfills will leak and can cause immense environmental damage. There will be large costs associated with cleaning up these messes in the future. Plastics in general makes up between 14 and 28% by volume of waste in general. Around the world over 200,000 plastic bags are dumped in landfills every hour (PlanetArk.com).Plastic bags in general take anywhere from 20 to 1,000 years to breakdown in the environment. This is a very long period of time; however, eventually they would breakdown and disappear. Once in a landfill though, they never breakdown. Modern landfills are designed so that nothing in them breakdowns. This means that as space becomes more of a premium something eventually will need to be done with the bags. There is a huge cost to this. All of these factors cost taxpayers billions of dollars over the years.

The plastic bags that are not put in the wastebasket end up as litter. Litter is a huge burden on society. Plastic bags cover the streets, clog drains and gutters, and are even linked to disease. Litter costs a lot of money to clean up. Possibly the largest and most problematic externality caused by plastic bag consumption is environmental damage. The environmental damage caused by plastic bags is enormous. Plastic makes up 80% of the volume of litter on roads, parks, and beaches and makes up 90% of floating litter in the ocean (BEC). In every square mile of ocean there are over 46,000 pieces of plastic. This puts an enormous strain on the environment. The little pieces of plastic act as a sort of sponge for chemicals. They soak up a million fold greater concentrations of such deadly compounds as PCBs and DDE (a breakdown product of the notorious insecticide DDT), than the surrounding seawater (Reusablebags.com). Marine life then eats these pieces and dies. It is estimated that over a 100,000 different birds, seals and whales die every year (Reusablebags.com). After the animal dies its carcass decomposes and the plastic is free to roam the ocean and kill again.

When plastic bags find their way into the ocean they kill endangered turtles. Turtles that confuse them for jellyfish, their primary food source, ingest plastic bags. The turtles then suffocate. Plastic bags wrap themselves around living coral and quickly kill them. This has become a huge problem for Australia, whose Great Barrier Reef is being threatened by little white bags of death. Plastic bags trap seals and sea lions, prevent whales from digesting and kill birds by the thousands.

source : http://www.plasticbageconomics.com/index.php

MERVYN

Hi people!

In review of the lectures this week, we have learnt:

• Market failure occurs whenever price mechanism fails.
• Economic efficiency in achieved when market is Productively efficient and Allocatively efficient. (MSB=MSC)
• Private Cost/Benefit is cost/benefit to a individual producer/consumer
• Externalities is cost/benefit affecting someone not directly involved in production/consumption of good, without compensation.
• Externalities in Production: Firms ; Externalities in Consumption: Individual
• Social Cost/Benefit=Private Cost/Benefit + Externalities in Production/Consumption
• Cost: Supply ; Benefit: Demand

Here are the questions, start posting!

1. Would a ban on plastic bags achieve Economic Efficiency in Singapore? Explain your answer.
2. Which type of externalities do the use of plastic bags constitute? Give examples.
3. Suggest alternative measures other than banning the use of plastic bags.

Here are some websites, hope that they will be helpful!

1. http://app.nea.gov.sg/cms/htdocs/article.asp?pid=2859
2. http://app.nea.gov.sg/cms/htdocs/category_sub.asp?cid=246
3. http://www.wildsingapore.com/news/20070506/070505-1.htm

Zhen Qiang

Hi 09s101! I have given out the Economics Notes on Market Failure on Friday (3rd April). Please let me know should you not receive the note. Do take this weekend to flip though at least the first few pages to give a head start to next week's lecture.

Remember to post on the blog regularly! If not, I will start to volunteer people! Haha, have a nice weekend ahead!

Zhen Qiang