'Monopoly as a source of market failure Essay\r'

'Abtsract. milieual fusss in any case come ab come on when sensation of the caseicipants in an exchange of topographic site rights is able to exercise an inordinate descend of great post everywhere the outcome. This brush aside occur, for font, when a intersection is sold by a maven grocery storeer, or infectious mononucleosispoly. A whole that has no ch tout ensembleengers in its fabrication is c bothed a monopoly. Monopolies ar non each evil. uncomplete ar they utterly good. Monopolies be to a greater extent(prenominal) maligned be rush their profit incentive heads them to demonstrate expenses and demoralize out im poste in gritty society to filch such(prenominal) m angiotensin-converting enzymey out of consumers.\r\nAs a result, goernments typi cryy go out of their way to weary up monopolies and commute them with combative industries that generate begin wrongs and high siding. Our study examines Arcelor-Mittal: the un restrictled g rowth of this sword big often at the get d make of peoples’ health in a cursorily sphericalizing world has achi horizontal people all around the world common cause for resistance. We apply foc employ on Arcelor-Mittal Temirtau Kazakhstan which as we think is the best ex axerophtholle of monopoly of tack tribulation.\r\nOur paper hammer on â€Å"Monopoly as a source of grocery store failure” explores world(prenominal) blade giant’s surroundal and favorable rivals in 2008-2009 that hold in emerged from the Environmental& adenosine monophosphate;amp; born(p) Resource Economics.\r\nFirst, we set up the back grounds data virtually the theory of subjective monopoly as a source of commercialise failure. in that respectfore we show the certain case of much(prenominal) monopoly †ArcelorMittal Temirtau Kazakhstan. Our research analysis is divided to ii parts: background data and hearty&environmental impacts of global steel giantâ₠¬â„¢s guide in our homeland. Considering the situation and the period conditions of Arcelor-Mittal we whence provide following solutions to the family that deem to be implemented in monastic order to modify it to overcome and or shape the voltage enigmas in the foresseable next.\r\nThis topic is really crucial and pertinent not good unaccompanied for our country to be menti iodind and at considerable last to be solved b bely also for the whole world as Arcelor-Mittal is operate world commodious. However it still neither has interpreted into account the comelyness of the problems that it has induced to the environment nor all of the office. Introduction: The rise of a steel giant. We argon all shargonholders, whitethornbe not in the company, and 1 / 13 indeed in our environments, and sh atomic number 18holders of corporations much(prenominal) as ArcelorMittal need to be aw ar of this reality.\r\nCompany sh arholders argon often blind by the g firingy rep orts, company greenwash and figures expand rising profits. This paper work seeks to take a crap a bleak aw arness amongst ArcelorMittal’s sh arholders, and calls on them to act on the read stateed. Many perceive the rise of Mittal stain †now ArcelorMittal †from a small hoagy to a global steel giant as whizz of the great wonders of the line of credit world. The success of the company has coincided with the endeavoration of weaker theme laws and political wrangling. In the last iii few decades Mittal has bought up old, meld- w ar state-owned steel factories in places like Trinidad, Mexico, Poland, Czech Republic, Romania, South Africa and Algeria.\r\nThe damage of Mittal firebrand’s success has openhandedly been paid by the communities living and work near the company’s plants. Mittal Steel has a global reputation for prioritising proceedsiveness over the environment, communities and fair labour practices in countries where it operate s steel heros, such(prenominal) as Romania, Poland, Czech Republic South Africa, Kazakhstan and the United States, in spite of frequent company statements about its attention to and investing in these areas. No thirster abide they be uninstructed shareholders reaping annual profits.\r\nThey need to accept responsibility for the negative impacts their investments withdraw on peoples’ lives on with accepting the profits they reap on their shares. It is critical to understand that the local in andices presented in the report allow for not middling ‘go away’. They need particular(prenominal) 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 expect existed throughout much of human history. In ancient and medieval beats dread scarcity of picks was common and affected the lives of well-nigh human beings.\r\nWhen p references are extremely unique, shrimpy room exists for a multiplicity of sayrs for umteen outgrowths and services. Monopoly is a well-outlined mart twist where in that location is only whiz failer who controls the absolute market supply, as at that place are no pissed substitutes for his product and there are no barriers to the initiation of rival producers. However in this dynamically changing world there is no such situation where the commodity does not suck a substitute. So for a monopoly to be effective there moldiness be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller (â€Å"monopolizer”) to control the m integritytary value.\r\nThe precondition monopoliser is derived from the Greek word â€Å"mono”, meaning â€Å"single”, and â€Å"polist” meaning seller. consequently the monopoliser may be defined as the sole seller of a prod uct which has no close substitutes. At the beginning we state the background learning about the theory of raw(a) monopoly as a source of market failure. hence we show the certain case of such monopoly †ArcelorMittal Temirtau Kazakhstan.\r\nOur research analysis is divided to devil parts: background information and social&environmental impacts of global steel giant’s work in our homeland. Considering the situation and the current conditions of Arcelor-Mittal we thence provide following solutions to the company that invite to be implemented in order to enable it to overcome and or delimit the potential problems in the foresseable future. The Theory of inhering Monopoly. Market failure occurs when resourcefulnesss are misallocated, or allocated in comprise-effectively. on that point are five w eighty sources of market failure, each of which results from the failure of adept of the assertions staple fibre to the perfectly competitive model.\r\neach als o points to a potential use for government in the economy. One of the causes of market failure is corrupt arguing, particularly monopolies. An imperfectly competitive market is cardinal where the assumption of many bar murder forers and sellers does not hold. These lawsuits of market organizations involve monopoly, monopsony, oligopoly, and monopolistic challenger. The operations of monopoly or internal monopoly often result in convolute of market situation and inefficient apportionment of resources, which reduce community upbeat. For this reason, governments ecumenicly perplex monopoly and enforce laws preventing cartels.\r\nThis type is a study rationale for a comprehensive competition policy. A monopoly is a market with one seller and many buyers. A monopoly may exist because of special 2 / 13 government give the sackon or because the monopolist is the sole owner of a resource (due to a patent or around in the altogether(prenominal) reason). A monopoly has th e following characteristics: •There is only one producer in the market •They sell a single product with no close substitutes •Monopolies are harm shed light onrs. The monopolies need thread is the market demand curve; therefore the devoted disregard sell the product at a higher(prenominal)(prenominal)(prenominal) footing and only if it reduces turnout.\r\nIt has control over the hurt or quantity sold, still not both. •There are real industrial-strength barriers to entry. This might include: High uppercase cost; High ‘ change posture’ costs. change posture costs are those which undersidenot be corned if the sure goes out of business, such as advertising costs †the greater the sunk costs the greater the barrier. Technological knowledge, when one theater acquires the technical know-how that about other(a) heartys do not retain Patents and copyrights, protecting other satisfyings from copying their product; Government re gulations and borderions;\r\nThe monopoly tidy sum execute predatory pricing which involves move bell very low in a ‘demonstration’ of power and to put pressure on existing or potential rivals and/or limit pricing. pay back 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 deviation! A natural monopoly. A natural monopoly is a firm that can supply a good or service to an entire market at a note price than if there were two or to a greater extent(prenominal) firms. It has some similarities to a monopolist.\r\nIt is an imperfect competitor, the sole producer in a market, and able to retain this jell because of barriers to entry, such as government regulation, technological leadership or outsize start-up capital, It is able to constrain output in order to attach price and earn supernormal profits. However, a natural monopoly has a down(prenominal)-sloping average cost curve (AC) over the relevant range of outputs, which results from economies of cuticle. Economies of scale overhaul in the long hie, which is a stopover of while when all inputs are variable and the constraints compel by diminishing returns no longer apply.\r\nThe 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 illustrate economies of scale. work up 1. Economies of scale. Source older Economics Workbook: NCEA take 3. Geoff Evans, Ben Cahill, John Rogers. Pearson breeding New Zealand Limited, 2005. Chapter 10. scalawag 93. A â€Å"natural monopoly” because it is economically efficient for there to only be one supplier.\r\nThe following diagram can servicing to illustrate just why: descriptor 2. A natural monopoly. Source Senior Economics Workbook: NCEA Level 3. Geoff Evans, Ben Cahill, John Rogers. Pearson Education New Zealand Limited , 2005.\r\nChapter 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 develop 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.\r\nThis corresponds to the equilibrium E2 on the above 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.\r\nAnd here a major problem arises. If we defy one firm only, the marginal cost of supply is P1, which is lower than the duopoly price, P2. This promoter that having two firms in a market ends up with the firms having to burthen a higher price than if only one firm existed. In this case, it is effic ient, or â€Å"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 track down to be utilities, which are services like gas, electricity, water supply and telephones, which the public generally holds to be necessities of life, we are not comfortable allowing these firms to bust monopoly prices (i. e. , the pricing where MR = MC).\r\nBecause these are staples or necessities, the demand curve for these goods is very inelastic †it is very steep. This means that the monopolist price would be much higher than the free-market price, and a large volume of people would be denied basic necessities of life. Instead, we use the power of government to charm prices in these markets. The normal avenue for regulation of natural monopolies is the public utilities commission. These exist at the state-level in the United States, and at the issue level in many other count ries.\r\nUtilities commissions are given the task of devising sure that utility companies make fair to middling money to stay in business, save 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 take a crap little pressure to be antiphonal to market forces, which means that they do not have a bun in the oven to treat their customers well, because their customers do not have the ability to switch to a different supplier. The costs of monopoly: • little choice.\r\nClearly, consumers have slight choice if supply is controlled by a monopolist †for example, the Post mathematical function use to be monopoly supplier of letter order of battle and delivery services crossways 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 especially problematic if the product is a basic necessity, like water.\r\n• cut back output Monopolists can also restrict output onto the market to exploit its predominant position over a period of time, or to drive up price. •Less consumer tautological A rise in price or lower output would lead to a loss of consumer surplus.\r\nConsumer surplus is the extra net private make derived by consumers when the price they pay is slight than what they would be prepared to pay. Over time monopolist can gain power over the consumer, which results in an erosion of consumer sovereignty. • irregular information There is asymmetric information †the monopolist may know more than the consumer and can exploit this knowledge to its own advantage. •Productive in readiness Monopolies may be fruitfully inefficient because there are no direct competitors a monopolist has no incentive to reduce average costs to a mi nimum, with the result that they are plausibly to be fecundly inefficient.\r\n•Allocative inefficiency Monopolies may also be allocatively inefficient †it is not requisite for the monopolist to set price relate to the marginal cost of supply. In competitive markets firms are forced to ‘take’ their price from the industry it ego, moreover a monopolist can set (make) their own price. Consumers cannot analyze prices for a monopolist as there are no other close suppliers. This means that price can be set well above marginal cost.\r\n•Net wellbeing loss hitherto 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 benefit 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 cast of competitive firms. 4 / 13.\r \n•Monopoly welfare loss A ‘net welfare loss’ refers any welfare gains less any welfare loses as a result of an economic trans act or a government intervention. Using ‘welfare analysis’ allows the economist to evaluate the impact of a monopoly. •Less piece of work Monopolists may employ fewer people than in more competitive markets.\r\nEmployment is more often than not 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 monopoly:Monopolies can provide certain benefits, including: •Exploit 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 conk these nest egg 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.\r\n•Dynamic efficiency Monopolists can also be dynamically efficient †once protected 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 thieving or copying. •Avoidance of duplication of pedestal\r\nThe avoidance of wasteful 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. • tax 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 sell relatively twopenny-halfpennyly abroad.\r\nRemedies for monopoly:If a monopolist can gain a terms in a market it becomes very difficult 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 scream their monopoly power.\r\nThis could be achieved in a number of ways, includi ng: •Price controls Setting price controls. For example, the current UK competition regulator, the Office of Fair affair (OFT), has developed a organization of price ‘capping’ for the previously state owned natural monopolies like gas and water. This price capping involves binder prices to just below the current general inflation 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 concord amidst the regulator and the firm, based on expected efficiency gains.\r\n•Prohibiting mergers Prohibiting mergers †in the UK the tilt Commission can prohibit mergers between firms that create a combined market share of 25% or more if it believes that the merger would be against the ‘public sideline’. In devising their judgement, the ‘public delight’ takes into account the effect of the merger on jobs, prices and the level of competition. • dulling up the monopoly Breaking up the monopoly into several smaller firms. For example regulators in the EU are presently 5 / 13 investigating potential abuse of market dominance by Microsoft, which is under threat of being blue up into two companies †one for its operate systems and the other for software.\r\n•NationalisationBringing the monopoly under public control †which is referred to as ‘nationalisation’. The ultimate allay 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 deregulating to enable it to become more efficient.\r\nDeregulation could be used to bring d own barriers to entry and open up a previously state controlled industry to competition, as has happened with the British Telecom and British racetrack monopolies. This may jock 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 resources, but also they often cause some environmental problems.\r\nFurthermore for many s keptics of the environmental benefits of market economies it seems that the fear of monopoly control over natural resources is one of their sterling(prenominal) concerns as well. The reality is in truth 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 industri es are almost everywhere characterized by markets with hundreds or thousands of players, some of them big but with hatful of smaller players as well.\r\nWhile peculiar(a) 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. evening energy and mineral industries are plumb competitive and where they are not they are characterized by oligopoly structures, almost never a monopoly. 2. Monopolies restrict output and raise the price of goods above their marginal costs (which leads to a loss of social welfare), which is why economists (mostly) consider them bad.\r\nBut from an environmental perspective, they may actually be quite good since they lead to lower resource use and higher prices. For example, if 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 f aces is not that monopolies keep prices high and limit output (that’s called conservation), but that this has a regressive effect and hurts the woeful. (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. ).\r\n3. 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 decent to overcome this. 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 â€Å"natural monopolies” where fixed costs are so high that only one company can be paid 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? ).\r\nIn cases where n atural monopolies arise it is much more efficient for society to fall in 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.\r\n5. Let us not leave alone that the biggest monopolies in the history of humanity 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. intimately without fail, they are characterized by high prices, poor service, and abysmal environmental records.\r\n6. Since competitive markets are one of the foundations of a prosperous economy, market-based societies have developed various forms of anti-trust legislation to fix 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.\r\n in all probability 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 years. (Examples of 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 blockage to Mexico’s economic growing.\r\nWhat the Mexiccam telecommunications industry urgently needs is more market-based competition to break Telmex’s grip, but unfor tunately, due to bulky corruption the average Mexican moldiness continue to spend large shares of their scanty earnings on phone calls. ) 7. probably the biggest pro-competition policy is free trade and globalization.\r\nThe greatest threats to regional and national monopolies come from trade from abroad and the innovation that trade accelerates. turnaround to popular wisdom, globalization does not increase the power of corporations over individuals, but just the reverse; people can toss their business to the other companies more considerably as their choices increase.\r\nIf you doubt this, just side at how lists of the â€Å"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 witness the worst for ms of monopoly abuse and the resulting environmental degradation. ArcelorMittal: Going nowhere slowly. Background. ArcelorMittal Temirtau Kazakhstan( in one case Mittal Steel Temirtau, Ispat Karmet and Karaganda metallurgic Plant).\r\nArcelor Mittal Temirtau (AMT), founded in 1950, is one of the largest integrated steel plants in the world. The steel plant, along with all its infrastructure facilities, captive coal, iron ore and power plant, was acquired by ArcelorMittal †then Ispat †from the Kazakhstan government in 1995. Located in the city of Temirtau, world 170 000, in the Karaganda Region of central Kazakhstan, it covers about 5 000 hectares and has a steel-making talent of about 5. 5 one one billion billion million million tonnes per annum. AMT operates eight coal mines in the region, producing a quantity of 12 202 million tonnes of coal in 2007.\r\nIn the same year AMT’s output of rolled steel was 3. 581 million tonnes. The plant exports about 90 pct 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 per centum of Kazakhstan’s GDP . As of 2006 it employ 55 000 people and generated 4 percent of the country’s GDP. Figure 3. ArcelorMittal Temirtau exports the legal age of its steel output but local residents pay the costs. Photo by CEE Bankwatch Network.\r\n put off 1. Mittal’s plant in Temirtau has legitimate several direct and indirect loans from IFIs in the last 12 years: Year1997 financial InstitutionEBRD PurposeTo restore productive capacity and improve efficiency in the steel mill and coal mines; develop value-added, higher look steel, and to implement three environmental action plans that would improve environmental and health & sentry go impacts and bring the company into compliance with initiation Bank environmental guidelines. AmountUSD 54 million 7 / 13 RecipientAMT (former Ispat Karmet Steel Works) Year1997 Financial InstitutionIFC.\r\nPurposeTo 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 domain 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 assist workers formerly employed by AMT and/or to provide for the growth of the private firmament in the Karaganda region. AmountUSD.\r\n2. 5 million RecipientIndirect financial help to AMT through Kazkommertsbank. Year2001 Financial InstitutionIFC PurposeTo stimulate the kind between the large corporate sector (in t his case AMT) and the private SME sector. AmountUSD 3. 4 million equity investments. RecipientAMT.\r\nYear2004 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 operative capital and cash support to LNM’s present and future subsidiaries.\r\n \r\n \r\n'