12. Price determination in the monopsonic labour market

Monopsony – monopoly of consumer – only one employer

Monopolist confronts the supply curve of whole market- to employ more labor a monopsonist has to increase wage rate.

There’s an only employer, so, to employ more workers it has to increase wage, that’s why S curve slopes up. Wages must be increased not only for additional worker but all the workers should be paid this increased level of wage. And that’s why the Mcwill be above AC because we have to pay to everyone=>MRC>AC

MRP=MRC – equil. in market (MRP-Marginal Revenue Product)

S curve shows us AC. AC- average wage rate paid to workers.

When the number of workers increase  the wages also increase, so higher wage rate is to be paid to all the workers.

M RC curve above and left AD curve.

MC>AC

Equilibrium. Dl=MRPL (productivity of labor). MRPL =MRCL

COST MINIMIZATION RULE

M onopsonist is not a wage taker, but a wage maker.

Min possible level of transfer payments is determined by Supply on the market.

We – lowest wage rate

In case of monopoly on goods market a firm had to determine the point n D curve where it wanted to be – a combination of price and quantity.

Monopsony has to choose a point in S curve (set of quantity of labor and wage rate).

Npc – equilibrium under perfect competition.

Monopsonist underemploys and underpays (We pc>We; Le<Le pc)

Bilateral monopoly–2 monopolists. Monopoly of employer (D side) and monopoly of labor-trade unions (S side).

They have the right to increase or decrease the wage rates from these sides – the strongest wins.

We can determine the highest and lowest possible wage rates.

Wmax – max level

Wmin – min level, level of monopoly.

They can negotiate and establish a price on the level of perfect competition (We pc) or somewhere else between Wmin&Wmax.

Conclusion: As there is only one employer, no one makes employer to offer higher wages and employer is interested in offering of wages as low as possible. A monopsony results in underemployment and underpayment.

13. Market failures and the economic role of the government

Market is not a perfect system

1. Externalities (external effects or spill over effects or third-party effects) are additional costs or benefits to society over and above those experienced by the individual producer or consumer. Externalities are the impacts of a person’s action on the well being of a bystander. Any market transaction assumes that there are 2 parities in the world: a producer and a consumer. Each party has its own costs and gains its own benefits. Sometimes individuals, firms or society in general can bear costs or gain benefits from the transactions in which they do not participate. In this case they are a third party.

Externalities can be positive and negative.

Negative ex-s are external costs of production and consumption (e.g. pollution: in this case marginal social costs (MSC) will be greater than marginal private cost of a producer, because MSC include external costs as well). If there are external costs of prod-n or consumption, it means that those goods are overproduced or over consumed from the point of view society and social optimum of output is less than the private optimum of output, resources are over allocated.

External benefits are positive externalities. (E.g. a large plantation of flowers). Such goods and services are under produced and under consumed from the social point of view. Resources are under allocated; social optimum of output is larger than private optimum.

The case with extern-s shows that very often market mechanism fails to allocate resources efficiently according to the public interest.

2. In some cases the market fails to produce particular goods at all. Public goods are the goods which are socially desirable and have great external benefits but not profitable for a private producer due to their specific properties:

   1. Prod-n & con-n of these goods results in large extern. Benefits relative to private benefits.

   2. P.g. are invisible, it is impossible to divide them and sell unit by unit

   3. Non-rival consumption; MC of supplying the public goods to 1 more consumer is 0

   4. P.g. are non-excludable: once it is provided it is impossible to exclude people from consumption

Public goods production is financed by the budget, people pay for them indirectly through taxes. Quasi-public goods (e.g. education, medicine)

3. Market power is the ability to influence the market price. In imperfect competition there is no allocative efficiency, no productive eff-cy, no Pareto eff-cy, there is a deadweight welfare loss; most part of consumer loss is gained by producers, but some part of it is not gained by anyone, it is a pure loss to society(not only price increase, output decrease as well)

4. Ignorance and uncertainty: a lack of information, no rational choice

5. Immobility of factors and time lags in response: factors can not move freely from industry to industry

6. Protection of people’s interests: market doesn’t solve social problem(children, disable)

7. Conflicts of aims: economic growth, full employment, price stability and balance of payments.

Economic role of the Government:

Aims

1. Efficiency

2. Equality and Justice

Functions

To strength and facilitate the operation of the market(to set a legal and social framework, to maintain competition(antimonopoly policy))

To do what market can not principally do, to modify the operation of the market

Sub functions

• Reallocating resources

• Redistributing income and wealth

• Stabilizing the economy

• Protecting people’s interests

 Reallocating resources

Public goods, externalities → the introduction of taxes, subsidies

 Redistributing income and wealth

I ncome is distributed not equally, not fairly (in Russia more than 30% live below poverty line)

Lorenz Curve – shows the degree of inequality in income distribution by size of income. The closer it falls down – the greater the inequality is.

Gini coefficient = A/(A+B).

G. c. = 0 absolutely equal distribution

G. c. = 0.41-now in Russia (in USSR 0.26)

Methods of redistribution incomes & wealth:

1)taxes(more for rich, less for poor);

2)subsides, benefits, social transfers;

3)the mechanism of prices.

ATR=TotalTax/Total Income * 100%

1) if ATR as Income progressive tax system;

2) if ATR= const at each income level proportional;

3) if ATR as Income regressive

(a) lump (tax is fixed in a certain sum of money

the d curve is not vertical, it is sloping down.

Total tax burden (tax revenue to the budget) = CP1AB

Tax Burden to consumers = P1AKP Total tax

Tax Burden to producers = CPKB

The greater the inelasticity of D – the greater the share of consumers.

 Stabilizing the economy

Antycycling regulation stop-go

 Protecting people’s interests(equal excess to education, medicine; complete and true information)

Instruments of Government regulation

Direct:

Administrative: is used when gov. wants to stop smth.

-Licensing; -Goods & resources rationing ; -import, quarters -antitrust law; -foreign exchange control; -legislation on labour relations, trade unions.

Economic:

Gov. can do smth. Itself

-Gov. operates as an employer, investor, producer, seller; -gov. purchases goods & services(gov. is consumer); -gov. transfers securities benefits, scholarships); items 2&3 help to redistribute 1/3 national income