Perfect Competition Market

Perfect Competition Market

1. Perfect competition is a theoretical market structure.
2. All firms are selling identical products.
3. All firms are price takers which means they cannot influence the market price of their product.
4. Market share has no influence on prices since the price is determined by supply and demand.
5. Buyers have complete information about the product being sold and the prices charged by each firm.
6. Resources (such as labors) are perfectly mobile.
7. Firms can enter or exit the market without any restrictions.

The Government Should Intervene in The Perfect Competition Market?

As a free country like Taiwan, the government is trying to do as few regulations or interruptions as they can. But sometimes, there are always some reasons the government should intervene or not. Most countries intervene in some specific market for multiple reasons such as national security, public health, avoid crime or fraud. However, even these restrictions seem to be positive, there are always some side effects that occur. The intervention is sometimes necessary and assists the market to increase the quality of the products or services. 

Reasons to Intervene

Most governments have a combination of many different objectives when they intervene in the market. 

Social Welfare

Without regulation, businesses can produce negative externalities without consequence. This all leads to diminished resources, stifled innovation, and minimized trade and its corresponding benefits. 

To Improve Variety and Quality

Choices are the basic power to move the economics forward. For instance, many Japanese railway companies are owned by private. If they are operating exactly the same lines and services, they don't have to compete with each other, they just have to operate like zombies. But if the government intervene in the market and regulate with the basic rules, the railway companies will follow up the steps to improve their services. Suppose the government regulates that all railways have to purchase insurance for their customers, those companies will now have to upgrade in order to stay in the market.

National Security

This is one of the most common reasons for governments to intervene in a perfect market since it is reasonable for a government to do it. For political reasons, it is also understandable. For instance, in the national defense industry, if firms can enter or exit the market without any restrictions, those secret data will be easy to out exposed.

For Macroeconomic

Governments are supposed to intervention to overcome prolonged recessions and reduce unemployment. Firms can enter or exit the market without any restrictions mean that the workers are at high risk. 

Public Goods

In a free market, public goods such as law and order and national defense would not be provided because there is no financial incentive to provide goods with a free-rider problem (you can enjoy without paying them). Therefore, to provide public goods like lighthouses, police, roads, it is necessary for a government to pay for them and out of general taxation.

Reasons for Do Not Intervene

Free market economists argue that government intervention should be strictly limited as government intervention tends to cause an inefficient allocation of resources.

Wrong Decisions

Governments are possible to make the wrong decisions and influenced by political pressure groups, they spend on inefficient projects which lead to an inefficient outcome.

Personal Freedom

Government intervention is taking away individuals' decisions on how to spend and act. The economic intervention takes some personal freedom away.

Reference

Hayes, A. (2020, February 5). Understanding Perfect Competition. Retrieved from https://www.investopedia.com/terms/p/perfectcompetition.asp

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330

Boundless. (n.d.). Boundless Economics. Retrieved from https://courses.lumenlearning.com/boundless-economics/chapter/government-intervention-and-disequilibrium/

Pettinger, T., & Wes. (2020, April 30). Should the government intervene in the economy? Retrieved from https://www.economicshelp.org/blog/5735/economics/should-the-government-intervene-in-the-economy/

File for bankruptcyinstead of completely shutting down?

Critical Thinking Question 1

Many firms in the United States file for bankruptcy every year, yet they still continue operating. Why would they do this instead of completely shutting down?

The Answer

In the United States, bankruptcy is governed by federal law. The state laws are often applied to determine how bankruptcy affects the property rights of debtors. However, there's a threshold. Bankruptcy cases are usually either voluntary or involuntary. Involuntary bankruptcy, which is the majority of cases, debtors petition the bankruptcy court. With involuntary bankruptcy, creditors file the petition in bankruptcy. The bankruptcy system generally tries to reward creditors who continue to extend financing to debtors and discourage creditors from accelerating their debt collection efforts. Avoidance actions are some of the most obvious of the mechanisms to encourage this goal.

Although they file for bankruptcy, and they possibly have to shut down in the end, they still continue operating. Why? Recall the profit-maximize firms are increasing their production until their marginal cost equals the marginal revenue, which doesn't make sense to produce one more to lose more money, and we can split the average total cost into two parts, the fixed cost, and the variable cost. The reason why they still stay in the market and continue operating is their operations can cover some fixed costs since the revenues are higher than the variable cost. If the price, the marginal revenue is higher than the variable cost, it means their operations actually help them to pay for some of their fixed cost. 

Suppose the Starbruce Bank is operating in the negotiation of bankruptcy. It earns $1,000,000 in revenue but has to pay $5,000,000 for fixed cost, and $200,000 for variable cost. So, the profit is $-4,200,000. If the Starbruce chooses to shut down, their revenue is zero, but still has to pay the $5,000,000 for the fixed cost. Compare those two options, you may find that continue operating is a relatively better choice.

Now we know the reason. Firms in the United States continue operating after filing for bankruptcy become it's less costly to file for bankruptcy and continue operating than to shut down because there are costs to shutting down and to resume business operations.

Critical Thinking Question 2

Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging 10% less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react?

The Answer

While the oil price rises in earlier years, America’s shale oil industry entering the market of a near-monopoly market which almost being controlled by the OPEC. They clearly need to consider how the monopolist might react. The OPEC reacted with predatory pricing, which uses the threat of sharp price cuts to discourage competition. In the beginning, the OPEC wants to reduce the marginal revenue generated by America’s shale oil industry to make them unprofitable, since they can produce at a very low price. 

Similarly, if I managing a small firm and thinking about entering the market of a monopolist, I would have to consider the predatory pricing the monopolist might react. And I also need to consider the roots of the monopoly, was it natural, control of a physical resource, legal monopoly, patent, or just intimidating potential competitors like the OPEC. Before setting the strategies to entry, I better know how it monopoly or what is the monopolist. 

Reference

https://en.wikipedia.org/wiki/Bankruptcy_in_the_United_States

Putin dumps OPEC to start a war with America's shale oil industry. (n.d.). Retrieved from https://www.worldoil.com/news/2020/3/6/putin-dumps-opec-to-start-a-war-with-america-s-shale-oil-industry

McFarlane, S., & Minczeski, P. (2019, April 18). OPEC vs. Shale: the Battle for Oil Price Supremacy. Retrieved from https://www.wsj.com/articles/opec-vs-shale-the-battle-for-oil-price-supremacy-11555588826