Government Intervention in Different Market Structures
| English | Chinese | Pinyin |
|---|---|---|
| per-unit tax | 从量税 | cóng liàng shuì |
| regulation | 管制 | guǎn zhì |
| marginal-cost pricing | 边际成本定价 | biān jì chéng běn dìng jià |
| average-cost pricing | 平均成本定价 | píng jūn chéng běn dìng jià |
| price controls | 价格管制 | jià gé guǎn zhì |
| antitrust policy | 反垄断政策 | fǎn lǒng duàn zhèng cè |
| government failure | 政府失灵 | zhèng fǔ shī líng |
Fixing failures — carefully
- Governments have a whole toolbox for market failures: taxes, rules, and price limits.
- But the right tool depends on the market it acts on.
- The same rule that helps a monopoly could hurt a competitive market.
- And every fix has a cost of its own.
Regulating a natural monopoly
- A per-unit tax 从量税 or subsidy shifts supply; on a negative externality, a tax can raise efficiency.
- Regulation 管制 of a natural monopoly sets the price it may charge.
- Marginal-cost pricing 边际成本定价 ($P = MC$) gives the efficient quantity but often forces a loss.
- Average-cost pricing 平均成本定价 ($P = ATC$) lets the firm break even, with a little inefficiency.
A regulated monopoly's costs
Marginal-cost pricing (P = MC) is efficient but can force a loss when average cost lies above it; average-cost pricing (P = ATC) lets the firm break even.
Marginal-cost pricing (P = MC) of a natural monopoly gives the efficient quantity but often:
A natural monopoly's average cost sits above marginal cost, so P = MC is below ATC — a loss.
Average-cost pricing (P = ATC) of a natural monopoly:
P = ATC covers all costs (break-even) but leaves output a little below the efficient level.
Antitrust and price controls
- Antitrust policy 反垄断政策 blocks mergers and practices that build market power, keeping markets competitive.
- Price controls 价格管制 (a ceiling on a monopoly's price) can raise output and welfare — unlike in a competitive market, where they cause shortages.
Policy that blocks mergers to keep markets competitive is called ______ policy.
Antitrust policy limits the build-up of market power.
A price ceiling on a monopoly can raise output and welfare, unlike in a competitive market.
A monopoly restricts output, so a well-set ceiling can push it toward the efficient amount.
Select all tools a government uses to address market failures.
Taxes, regulation and antitrust are all real tools; ignoring it is not a fix.
Government failure
- Intervention is not free. Government failure 政府失灵 happens when the cure is worse than the disease.
- Regulation costs money, information is imperfect, and political pressure can distort choices.
- Good policy weighs the market failure against the cost of fixing it.
Government failure occurs when:
When the cure costs more than the disease, intervention makes things worse.
Governments fix failures with taxes, regulation, antitrust, and price controls — but the effect depends on the market. Regulating a natural monopoly trades marginal-cost pricing (efficient, loss-making) against average-cost pricing (break-even). Beware government failure: the cure can cost more than the disease.