Monopolistic Competition. Монополистическая конкуренция.
Monopolistic competition has the following market characteristics:
1) A large number of independent sellers: (1) Each firm has a relatively small market share, so no individual firm has any significant power over price. (2) Firms need only pay attention to average market price, not the price of individual competitors. (3) There are too many firms in the industry for collusion (price fixing) to be possible.
2) Differentiated products: Each producer has a product that is slightly different from its competitors (at least in the minds of consumers). The competing products are close substitutes for one another. There are three important forms of product differentiation: 1) Differentiation by style or type; 2) Differentiation by location; 3) Differentiation by quality.
3) Firms competition in quality, and marketing as a result of product differentiation. Quality is a significant product-differentiating characteristic. Marketing is a must to inform the market about a product’s differentiating characteristics. In addition, consumers gain from the increased diversity of products.
4) Low barriers to entry and exit so that firms are free to enter and exit the market. If firms in the industry are earning economic profits, new firms can be expected to enter the industry.
I
n
short-run:
Firms in monopolistic competition face downward-sloping demand curves
(price
searchers).
Their demand curves are highly elastic because competing products are
perceived by consumers as close substitutes. Its average total
cost curve is U-shaped
as firm has an upward-sloping marginal cost curve, but that it also
faces some fixed costs.
I
n
the long run,
equilibrium of a monopolistically competitive industry, the
zero-profit-equilibrium,
firms
just break even. The typical firm’s demand curve is just tangent to
its average total cost curve at its profit-maximizing output.
Besides, if the typical firm earns positive profits, new firms will
enter the industry in the long run, shifting each existing firm’s
demand curve to the left and vice versa.
Firms in a monopolistically competitive industry have excess capacity: they produce less than the output at which average total cost is minimized. The higher price consumers pay because of excess capacity is offset to some extent by the value they receive from greater diversity. Hence, it is not clear that this is actually a source of inefficiency.
Advertising and brand names that provide useful information to consumers are economically valuable.
The Economic Theory of Taxation. Экономическая теория налогообложения.
Taxes are necessary: all governments need money to function. Without taxes, governments could not provide the services we want, from national defense to public parks. But taxes have a cost that normally exceeds the money actually paid to the government.
Example. An excise tax (no matter on whom it is levied) drives consumers to pay higher prices and producers receive lower prices, leading to a fall in the quantity transacted. It creates inefficiency by distorting incentives to engage in mutually beneficial transactions and creating missed opportunities. The incidence (measure of who really pays) of an excise tax doesn’t depend on who the tax is officially levied on, rather, it depends on the price elasticities of demand and of supply. The higher the price elasticity of supply and the lower the price elasticity of demand, the heavier the burden of an excise tax on consumers (e.g. gasoline). The lower the price elasticity of supply and the higher the price elasticity of demand, the heavier the burden on producers (e.g.parking).
R
evenue:
An excise tax generates tax revenue equal to the tax rate times the
number of units of the good or service transacted. Cost:
It reduces consumer and producer surplus by discouraging some
mutually beneficial transactions. Inefficiency:
The government tax revenue collected is less than the loss in total
surplus. The measure of inefficiency is deadwight loss - difference
between the tax revenue from an excise tax and the reduction in total
surplus. The larger the number of transactions prevented by a tax,
the larger the deadweight
loss.
As a result, taxes on goods with a greater price elasticity of supply
or demand, or both, generate higher deadweight losses. There is no
deadweight loss when the number of transactions is unchanged by the
tax. The total amount of inefficiency resulting from a tax is equal
to the deadweight loss plus the administrative costs of the tax.
Tax goal: 1) Efficiency -> minimization of both the sum of the deadweight loss due to distorted incentives and the administrative costs of the tax. 2) Fairness/equity -> compliance of taxes with two major principles of tax fairness, the benefits principle (those who benefit from public spending should bear the burden of the tax that pays for that spending) and the ability-to-pay principle. 3) Tradeoff between the two -> increasing tax efficiency implies decreasing fairness. E.G. The most efficient tax, a lump-sum tax, does not distort incentives but performs badly in terms of fairness. The fairest taxes in terms of the ability-to-pay principle, however, distort incentives the most and perform badly on efficiency grounds. 4) Governmental role is to define the balance between the two based on what is the most important for its citizens.
Tax structure and types: Every tax consists of a tax base, which defines what is taxed, and a tax structure, which specifies how the tax depends on the tax base. Different tax bases give rise to different taxes—the income tax, payroll tax, sales tax, profits tax (tax on the earnings an employer pays to an employee), property tax, and wealth tax.
Proportional tax is the same percentage of the tax base for all taxpayers. A tax is progressive if higher-income people pay a higher percentage of their income in taxes than lower-income people and regressive if they pay a lower percentage. Progressive taxes are often justified by the ability-to-pay principle.