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Firms have excessive market power



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Sana03.04.2022
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Firms have excessive market power
A firm with market power has the ability to affect either the prevailing price in the market or the total quantity of the product produced or service delivered to all consumers. This market power can be the result of conditions such as special access to raw materials, delivery channels, an insurmountable technical advantage,
or increasing returns to scale in production. These advantages can lead to monopolies or oligopolies having excessive market power. And firms that have this market power will maximize their profit at a price above or at a level of output below what would be achieved in a competitive market. Economists have concluded, however, that government policy should not necessarily be aimed at eliminating firms’ market power. Not only would this be impossible, but it would also be undesirable, since much of the innovation and productivity growth in our economy comes from firms with such power. Instead, the goal of government policy is to prevent firms from abusing their power in a way that unduly harms consumers and reduces the amount of innovation. Examples of excessive market power often cited include Microsoft and its operating system, telecommunications providers with licenses to build cellular networks, and utilities with power grids. For telecommunications carriers and power utilities, governments often regulate rates to protect consumers.
Public goods are not paid for by private actions
Certain things, like national defence or infrastructure, are referred to as “public goods.” Once they are produced, it is very difficult, and often impossible, to exclude anyone from using public goods without paying. In a free market, self-interested individuals tend to be “free-riders” of the good once it becomes available – not paying for the benefit they receive. Because producers are also profit-driven in a free market, public goods will be under provided or not provided at all.
This leads to an inefficient allocation of resources in the economy, as necessary public goods are less available than is required for optimum efficiency. One remedy is for government to provide the good, financed fromits tax revenues or to impose tolls on users of the public good.
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