Economics and the Environment
Essential Question 1
How does the United States evolve from a “Household
Economy” to a “Mixed Socio-Capitalist” Economy?
Enduring Understandings:
1. Enlightenment Ideas impact economy and environment
2. Reorganization of Natural Resource usage
3. Competing interests of Capitalism
4. Public Domain in a Democratic Society
5. Changing Roles of Owners and Workers
6. Resources become tied to the Land Owner
Economics and the Environment
Essential Question 2
How do Energy Sources and the Industry combine to create
an Industrial Revolution?
Enduring Understandings:
1. Accessing Natural Resources impacts the Ecology and the
environment
2. Water, Timber, and Coal are essential resources for
economic growth
3. Combining Natural, Labor, and Capital Resources changes
work patterns
4. Redistribution of Resource ownership also redistributes
wealth
5. No focus on conservation of resources or the environment
during the Industrial Revolution
Economics and the Environment
Essential Question 3
How does the United States change from small, rural
marketplaces to large, urban, marketplaces?
Enduring Understandings:
1. Big Business Structures emerge
2. Horizontal and Vertical Integration is devised
3. New Sources of Energy and Technology emerge
4. Exploitation of abundant Common Labor occurs
5. Economic based Class Structure prevails
6. No concern for Environmental damage or impact is the norm
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 collection and delivery
UK and consumers had no alternative letter collection and delivery service.
services across the
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.
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 surplus
A rise in price or lower output would lead to a loss of consumer surplus. Consumer
surplus is the extra net 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 erosion of consumer
sovereignty.
Asymmetric information
There is asymmetric information – the monopolist may know more 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 above 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.
A ‘net welfare loss’ refers any welfare gains less any welfare loses as a result of an
economic transaction or a government intervention. Using ‘welfare analysis’
allows the economist to evaluate the impact of a monopoly.
Less employment
Monopolists may employ fewer people than in more 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 monopoly
Monopolies can provide certain benefits, including:
Exploit economies of scale
If the firm exploits its monopoly power and grow large it can also exploit
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 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
theft or copying.
Avoidance of duplication of infrastructure
The 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.