Modeling of Development and Cooperation †Free Samples to Students

Question: Discuss about the Modeling of Development and Cooperation. Answer: Introduction: The global economy runs efficiently based on international trade. At the heart of this international trade lies the question of what and in how much quantity things should be produced and who is going to be the targeted consumer for whom the goods are being produced. The market in which different firms operates have been classified by the economists based on certain characteristics it possessed. Amongst the classification made by the economists, perfect competition and monopoly are the two extreme segmentations. There also exists segmentation named as oligopoly, monopolistic and monopsony market. This write-up deals with the case of natural monopoly. In the next segment of this article, the concept of natural monopoly has been elaborated. In addition the ways in which firms operating under this market structure can be regulated has been discussed. It is the government of any country who can take initiative and lay down some regulations based on which the firms can be restricted to operate in full-swing. In addition, the need for such control over any particular firm has also been discussed followed by real life examples. The last section of this write up summarizes the entire findings and tries to justify the usefulness of government intervention if any. Monopoly market has been classified by the economists as the market structure where a unique product is sold by a single seller and faces no competition from others. Henceforth, they enjoy the right of quoting prices according to their own terms and often it has been observed that the prices quoted by them is much higher than the expected price if they had operated under any other market structure. In other words, there is absolutely strict restriction in the entry of firms in the market as made up the existing firm. Definition and Pricing: According to (Stiglitz Rosengard, 2015) natural monopoly is an unique phenomenon in market structure which has been characterised by either high fixed cost, unique technology used or specific raw materials required in production of the goods. Usually the lack of similar technology or a high level start up cost often barred the other enthusiast entrepreneur from entering into the market. A better depth into the concept and pricing under natural monopoly can give a clear vision about the need for government intervention under such market structure. According to (Hawley, 2015) whenever a single firm within a particular market structure can operate more efficiently than any other firms enter the market is known as natural monopoly. Under this structure, the single operating firm is able to reap the maximum benefit within the industry. The figure drawn below is going to help us in understanding this market structure. In the above figure, price and quantity has been plotted in the vertical and horizontal axis respectively. The long run average cost curve (LRAC) has been plotted in red colour whereas the demand curve in green colour. Under monopoly market the demand curve itself is the average revenue curve. It can be seen from the figure above that at a very high quantity of 200 units the firms AR becomes equal to the AC. Henceforth it can be stated that the firm is able to serve the major demand of the consumers by keeping their price low and producing bulk of goods. In reality though this situation seems to be good for the economy but the monopolist producers are guided by their own interest in profit making. Since they have no competitors in their field they always try to quote the maximum price possible for selling their products. Under such a circumstance it would be seen that they are producing only 50 units of goods in the market and selling it at a very high price as shown in the figure above. Hence free operation of the producer under natural monopoly will lead to sub-optimal production and inefficient resource allocation. In addition, many consumers will be deprived of their demand due to fierce competition and lack of available goods. Hence, under this situation often the government intervenes and tries to regulate the market through various tools available at their disposal. Problem or Flaws of Natural Monopoly: The main problems that arise when a firm operates under natural monopoly are that of asymmetric information, moral hazards and inefficient allocation of resources giving rise to sub-optimal level of production if remain un-regulated (Lim Yurukoglu, 2015). If the goods and services remain un-regulated and are privatized then the producer will charge prices so high that people will stop demanding for the same. Hence, the resources that could have been used to produce bulk of goods will then be used for producing lesser quantity of goods as per the demand of the consumer. This will lead to inefficient allocation. There have been several theories put forward by the economist in regards to the steps that can be taken by the governing authority of any country in controlling the natural monopoly firm. Amongst them the well-known and effective steps have been either putting up a quota on the minimum goods produced or maximum price that can be charged for the goods. Other than that the government may provide subsidy to keep the price at check and allowing more people to reap the benefit of the goods (Vikharev, 2013). Few real life examples of natural monopoly are given below and the ways in which the government regulated it have been discussed thereafter. The railway system in India and China is a classic example of natural monopoly. However it is not regulated by any private sector but the government of India bears the sole responsibility of operating this system (Bordie, Wilson, Kuang, 2014). Other than that the energy production in the form of oil and natural gas also is a part of natural monopoly with one company enjoying economies of scale and providing service to almost the entire nation. In case of United Kingdom and United States, the telecom building network and its maintenance comes under the natural monopoly market (Borenstein Bushnell, 2015). In U.S.A. the supply of electricity has also been considered under natural monopoly. In the case of telecom service and electric supply it has been seen that there is existence of more than one supplier but dominance of a particular supplier and their ability to reap benefits from economies of scale makes these sectors an example of natural monopoly. The ways in which these sectors have been regulated is discussed hereafter. Government regulation to maximize efficiency: Research has been carried out by several economists in studying the efficiency of the most important transportation service in the world. According to a research economists have taken up 20 countries and surveyed their railway network system. Unanimously they have found out that in all these countries this vital transportation system has been regulated by the government and minimal privatization have been involved (Borenstein Bushnell, 2015). Further studies has shown that this similarity is due to the fact that providing this service requires huge initial cost followed by constant recurring investment in the forms of maintaining signal, traffic and other infrastructure. Under this circumstances if things were left to private companies then they would have been able to efficiently supply the service but at an excessive high cost. This would lead to market failure. Hence, the government felt the need to control this natural monopoly market by providing the service by them. In case of Indian economy, the government pays a huge amount of subsidy in the local trains and tries to collect as much revenue possible from the goods train to balance their expenditure (Laurino, Ramella, Beria, 2015). Another paper tries to find out the reason behind intervention of the government of USA in regulating the supply of electricity and water services in the country (Nepal Jamasb, 2015). It has been observed that these two services also fall under the category of natural monopoly. Cost-benefit analysis have shown that if multiple company operates in providing drinking water within any particular region of the country then it is going to lead market failure. Construction of pipelines of different companies into each household will incur a huge cost and people will only use any one of them, while others will be unused. Hence, the government has intervened and set up regulations to properly distribute drinking water to the people through proper distribution rights to the company dealing with it. Similarly supply of electricity and telecommunication system within the city incurs huge fixed cost and henceforth the government intervened by implementing proper competition policy and maintaine d peace in trade and commerce amongst the electric supply companies (Cherry, 2014). Natural monopoly exists in case of supply of essential goods like oil and natural gas. It can be debated that there are several companies engaged in the world in extraction of oil and natural gas but when it comes to market power only a few company from the OECD countries reap the major benefits. In addition, they have become so powerful that they can often cause harm to the world by curtailing their production or through artificial price hike. Hence, the government of almost all countries are very sensitive about the supply of this particular commodity (Mehrotra, 2017). They are also sensitive about the international trade regulation regarding oil and natural gas and always try to maintain a balance between the price and supply of the goods. In case of India, it is the ONGC who have the major share of the market. In China, amongst the top 5 energy supplying companies, 3 are solely owned by the government and the other two are regulated to a great extent (Hu Dong, 2015). In USA, it is Chevron who rules the market along with few other major companies. It has been noticed that in all these companies there exist one similarity and that is though some are state owned and some are privatised but all of them are stringently regulated by the government of the respective nation. Conclusion: Hereby it can be said that there exist different market structure within an economy depending upon the number of buyers, sellers, start-up cost, barriers to entry and exit and other such factors. Amongst all these types, perfect completion and monopoly are the extreme scenario where the former is an utopian situation and the later exists with some level of discrepancies. It has been seen that within the monopoly structure whenever a firm is characterised by high level of fixed cost and continuous falling average cost it naturally bars other firms from taking part into the competition. Often this can be the cause of market failure and hence under such a situation it has been found that the government of that economy intervenes and regulates the market. It has been observed that in most cases it is the essential public goods that fall under natural monopoly like the supply of electricity, transportation via railway network, supply of drinking water, etc. The greatest threat possessed u nder this market structure is that of market failure and sub-optimal utilization of resources. Hence all over the world researches are carried out by taking both quantitative and qualitative data in finding out a proper solution of this problem. It has been seen that it is only the higher authority that is the government through proper implementation of trade rules and competition policy can curb the problem posed by the firms under the market structure of natural monopoly. The economists through regular debates and continuous researches are trying to find out if any alternative situation can be create which might lead to lack of market failure. There lies further scope of research about the role and the need of the government in curbing the problem of natural monopoly throughout the global economy. References: Bordie, R., Wilson, S., Kuang, J. (2014). The Importance, Development and Reform Challenges of Chinas Rail Sector. Borenstein, S., Bushnell, J. (2015). The US electricity industry after 20 years of restructuring. Annual Rev. Econ , 437-463. Cherry, A. B. (2014). Historical mutilation: How misuse of'public utility and'natural monopoly'misdirects US telecommunications policy development. Hawley, E. W. (2015). The New Deal and the problem of monopoly. Princeton University Press. Hu, A., Dong, Q. (2015). On natural gas pricing reform in China. Natural Gas Industry . Laurino, A., Ramella, F., Beria, P. (2015). The economic regulation of railway networks: A worldwide survey. The economic regulation of railway networks: A worldwide survey. . Transportation Research Part A: Policy and Practice , 202-212. Lim, C. S., Yurukoglu, A. (2015). Dynamic natural monopoly regulation: Time inconsistency, moral hazard, and political environments. . Journal of Political Economy. Mehrotra, A. (2017). Issues and Challenges in Development of Efficient Gas Market. In Natural Gas Markets in India . Springer Singapore. Nepal, R., Jamasb, T. (2015). Caught between theory and practice: Government, market, and regulatory failure in electricity sector reforms. Economic Analysis and Policy , 16-24. Stiglitz, J. E., Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International Student Edition. . WW Norton Company. Vikharev, S. (2013). Mathematical modeling of development and reconciling cooperation programs between natural monopoly and regional authorities.