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Understanding Monopolies and Antitrust Laws for Market Regulation

Learn about monopolies, their negative impact on markets, the concept of socially optimal pricing, and how antitrust laws work to promote competition. Explore the role of government in regulating monopolistic practices.

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Understanding Monopolies and Antitrust Laws for Market Regulation

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  1. Market Failure #3 Monopolies

  2. Monopoly Review • Draw a monopoly making a profit. Label price, output, and profit. • Identify three specific reasons why monopolies are bad. • Label the Fair Return price and output. • Label the Socially Optimal price and output. • Explain why taxing a monopoly is a bad idea.

  3. Monopoly Socially Optimal $9 8 7 6 5 4 3 2 Unregulated P MC ATC Fair Return Profit =$5 D MR Q 3 1 2 3 4 5 6 7 8 9 10

  4. Government in Action:Antitrust Laws Legislative Executive Judicial

  5. WHAT ARE ANTITRUST LAWS? • Laws designed to prevent monopolies and promote competition. • After the Civil War, advances in technology and transportation lead to national markets. • Eventually only a few firms began to dominate industries: Railroads, Steel, meatpacking, coal, etc. • Why are monopolies a Market Failure? • Monopolies destroy the key ingredient of the free market system- Competition. • To fix this MARKET FAILURE the government must get involved.

  6. WHAT DOES THE GOVERNMENT DO? • Legislative Branch • Passed laws designed to stop monopolies • Sherman Act of 1890- • “Every person who shall monopolize …or conspire to monopolize…shall be deemed guilty of a felony.” • Executive Branch • The Federal Trade Commission must approve all corporate mergers. (Like AT&T and…) • When firms use anti-competitive tactics the Department of Justice files suit against them. • Judicial Branch • Supreme Court finds the firm guilty or not guilty and assigns a punishment.

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