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Industry Economics - Essay Example

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Deadweights can occur and become severe due to the presence of monopolistic pricing where there exist artificial scarcities, subsidies and taxes or where there are price ceilings and floors that are binding on the parties trading (Muller, 2012). Drawing from the contributions of Cowling along with Muller economists should be greatly concerned because the two suggested that the estimates made on deadweight losses are usually sensitive to the assumptions made concerning the elasticity’s of demand. The two made further adjustments to Harburger’s methodology which suggested that, deadweight losses are measured by determining the differences that exist between the rates of return for a certain industry with the average rates of return that have been gotten for all the other similar industries (Cowling & Waterson, 2003). The adjustments suggested that the prices charged on the elasticity’s are equal to one. The two additionally stated that a company’s maximizing price for profit is equal to the price elasticity’s of demand. According to Cowling along with Muller, the industry’s deadweight loss equals half the monetary profits for all firms in an industry (2003). The conditions that are necessary for deadweight to become severe include environments where there exists monopoly pricing along with the presence of artificial scarcities. Monopolies usually set their prices without any regard to the strategies that are being used by their competitors. This will normally make the consumers to go for

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the available substitute goods which may not be available thereby causing the marginal cost of a commodity to rise. When compared to the marginal benefits being reaped from using the products, the products can be said to experience a deadweight loss since their costs outweigh their benefits. When the demand for a product is more elastic, the monopoly in an industry tends to lower prices so that more of their products are sold (Cowling & Waterson, 2003). The monopolist within a certain industry thus tends to set the prices demand for their products when their demands are elastic. This is because the price set by a monopolistic trader can be termed as a function that does not decrease in relation to the marginal costs incurred. Welfare losses do not occur do not reduce monotonically when demand is more elastic even if the monopolist profits increase. This happens because changes in quantity are usually small when a product’s demand is inelastic which in turn narrows the width of the deadweight loss triangle (Muller, 2012). Another condition which makes the deadweight in an industry to become severe is the presence of taxes along with subsidies. According to the Harberger formula for calculating deadweight losses, increases in taxations happen when demand for a product is more elastic. This only happens in a market where there is competition and the tax charges are given to all the participants within this market. In monopoly markets where taxes are accounted for the monopolists profits vary according to the elasticity levels being experienced by their products. Taxes usually assist in the redistribution of money from the rich people to the poor who usually benefit more from their use. When an excessive burden through taxations is placed on the people, the society greatly suffers due to the high prices that are charged

Summary

Deadweight loss is the loss that is incurred due to the loss of monetary efficiency that occurs when the equilibrium of goods or services has not reached pareto optimality…
Industry Economics
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