Course ECON20039: ECONOMICS FOR MANAGERS

Assessment task 2: Research Essay

Student Name: Van, Truong
Student Number: 12022145
Campus: Sydney
Lecturer: Dr. Badri Bhattarai
Tutor: Hong To
Word Count: 2913 words

12022145 ECON20039 Research essay

I. Introduction
The economics have defined that Firms sell goods and services under different sets of
market conditions which economists call market structures (Layton, Robison, Tucker, 2016,
p.158). There are four types of market structures; they are perfect competition, monopoly,
monopolistic competition and oligopoly. Each market type has some factors that distinguish
to the others. This essay will examine the key characteristics of the four markets as
mentioned above and their applying in the real world. Then, it will clarify the incurring of the
negative externalities when the market failure and the government intervention to deal with
their effects. Finally, a case study in real life will be given in details and the ways which the
government has addressed the issue.

II. Market Structures

1. Perfect Competition
Perfect Competition is the market structures that identified by three characteristics
such as large numbers of small firms, the homogeneous of products and there is an easy entry
into and exit from its market (Layton et al.,2016). There are thousands of firms in the Perfect
Competition market, and each firm has a tiny market share compare to the whole market.
Therefore, any changes or acts of one firm can not effect on the others. It is clearly that the
Perfect Competitions firms sell the similar products of services and goods because they have
a little of investment and resources. Also, there are no barriers for the firms such as financial,
technical or the imposing of government so the firms can come into and exit from the market
that do not need to have any legal reasons (Layton et al.,2016).
There will question about is the perfect competition exist in the real world? There are not any
perfect competition in worlds market. However, it is considered some industries have similar
structures of operation (Whiting,2016). Farm markets and cleaning markets are examples of
perfect competition. Buyers can easily find many products in farm markets with the same
type of fruits and vegetables and herbs, and they almost come with the same prices
(Whiting,2016). In addition, because the size of individual farm sellers often small and there
are no legal barriers imposed by the government, they can easily come and exit markets
whenever they want to do so.

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2. Monopoly
Contrast to the perfect competition; the monopoly is the market structure where there
is only one seller for a unique product. Therefore, it is likely that one firm may become the
industry(Heakal,2015). A product can be seen as unique, if it has no close substitute. This
mean the firm will not have any competitors with its products. Electricity and water supplied
by a local government can be seen as the unique because there is almost no substitute for
these products. Although there is a close substitute for drinking water such as bottled spring
water, it can not be a substitute in term of washing or bathing (McTaggart, Findlay & Parkin,
2007, p.252). Similarly, in spite of many development and innovation of solar power in
recent years, it can not consider as a substitute in the generation of electricity by using fossil
fuel or nuclear energy.
Furthermore, when a firm approach into the monopoly market, it will be restricted with many
barriers which could be placed by the government and related to cost (Prateek,2016). A study
(Barrier To Entry,2013) revealed, Barriers to entry are factors that prevent a startup from
entering a particular market.
There are many elements of barrier that government imposed on firms when they enter into a
monopoly market. These result could be the ownership of government or franchise and
licence issues (Layton et al.,2016). Doing this, the government can establish many legal
barriers by law, patents, copyright or giving companies exclusive right. For example, in
some countries, by law companies can have exclusive right to operate some major supplies of
water, electricity, and petrol.
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Another form of government barrier is copyright and patent give the authors the exclusive
right to their products in a limited time. Some argue that it is important to have copyright and
patent because it helps people to create and innovate as well as a guarantee for a new idea and
products, to make a benefit over a period. For instance, the copyright of Mickie Mouse is
belong to Disney, and it has an exclusive right to use (Prateek,2016).
A further barrier that should be considered in the monopoly market that is capital costs and
economies of scale. This mean, the new competitors enter the new market are required to set
up many infrastructures for the industries, this may be pretty expensive, and the cost of
products of these new firms may be higher the existing firms (See Figure 2).

3. Monopolistic competition
There are three key factors that determine whether a market is a monopolistic
competition or not; these are: some sellers trading on the market, sellers compete together byproducts differentiation and firms can easy entry into or exit from the market(Layton et
al.,2016).
Because the scale of a firm in the market is quite small, so any decisions of the firm will do
not effect to each other. However, firms can offer over their price of products and services as
a price taker to maximise their profit. Doing this, firms often make their products differed in
many methods to compete with other competitors. A study (Economics Online,2015)
reveal A central feature of monopolistic competition is that the products are differentiated.
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One of the key features of the differentiation of a product that is physical factors, which the
sellers use to change a product in shape, colour, material use and performance to make it
more attractive and selective for customers choice.
Another method that the monopolistic competitors could take into account that is marketing,
which the firm use to differ the imaginary of products through advertising, trademark,
distinctive packaging and promotional techniques(Kumar,2016).
Firms under monopolistic competition are similar to perfect competition when they are
feasible to entering and shut down from the market; it depends on the market condition. If the
existing firms are earning maximum profits, the new firm will enter and taking way the others
market share. Therefore, the supply will increase, and the prices are going to decrease, and
the marginal revenue is diminishing. This processing comes to the point where the prices are
lower than the average variable costs of input; the existing firms will make losses and exit the
market (Kumar,2016)(See Figure 3).
Monopolistic competition firms are more realistic and available in the real world; restaurants
are one of the real examples of this market structure. It is clear to see that a dinner easily
finds on every menu of a restaurant. However the price may be lower or higher which depend
on its quality of foods and services, locations, brand recognization and so on(Layton et
al.,2016).

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4. Oligopoly
While monopoly is the market structure in which a single firm dominate the industry,
there are a few players in the oligopoly share the market. Besides, to define exactly how large
an oligopolist is, the economics use concentrate ratios to calculate the percentage of market
share of a firm in a whole market. The higher concentrate ratio, the larger sales of the firms in
the total market and the more effect to the market price.
One of the most distinguishing feature of oligopoly to other market forms is the players do
not act independently. In the same market, when one player makes its decisions to change the
market condition, this will effect directly on other players who will react to compete against
to maintain customers, sales and market share(Guru,2015). To illustrate, Coca-Cola and Pepsi
are often maintained a high percentage of the global market for the beverage with around 36
percentage and 14 percentage respectively. Therefore, a decrease in price either Coca or
Pepsi will have major effects on the other brands(Joy,2015). The kinked demand curve in
Figure 4 will describe this monopolys feature.
Unlike the monopoly, in the market condition of oligopoly, firms can sell whether a monoproducts or differentiated products, this depend on the business strategies of each firm on its
market. For example, although Coca-cola and Pepsi have the same traditional products in soft
drink, however, Coca sometimes release new products such as Coca life or Coca zero and so
on to gain more market share and profits by increasing the price of these new products.
It is considered that there are many barriers for a startup to become an oligopolist, these could
be the requirements of financial, legal barriers such as licences or patents(Layton et al.,2016).
However, the most formidable barriers for oligopolist to enter into the market that lay on the
scale of economics. Thus, this refers to the reduction of cost of a unit by increasing the
amount of production. If the scale of economics is done correctly, it can help the firms gain
more profitability and advantages of competition, as well as to discourage other firms to entry
into the market or even to make the existing firms go over the game(Economies of
Scale,2016).

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III. Negative externalities

1. Explain negative externalities
There are a number of reasons that lead to the failure of a market in which may
become inefficient operation. As a result, it causes many major issues that have effects on the
development of a nation. One of the most common reasons for market failure is externalities,
which can be a negative or positive influence on the third-parties (Layton et al.,2016).
According to the economics, negative externalities are those harm someone else rather than
taking benefits for social in the long term (Perloff,2012). For instance, the consumption and
production of tobacco too much will have disadvantages for the peoples heath whether they
want or not; this is not only because of the smoke in cigarettes can cause some diseases but it
is also tobacco manufacturer could pollute the air surrounding(Kinh t khng kinh th,2015).
Perloff (2012,p.627) argued that because competitive markets produce too many negative
externalities, government intervention may provide a social gain.This mean, in the
marketplace where the sellers are likely to gain the maximize profits and buyers tend to gain
the highest benefits when they purchase a good, so this make negative externalities occur. It
can be said that the more negative externalities, the larger negative effects on socials aspects.
Therefore, it is necessarily for the government to get involved in the market to make it
become allocative efficiency.
There are two ways for the government to correct negative externalities. One solution that is
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the government may increase taxes and fee for a manufacturer who produce over the social
desirable to establish an efficient equilibrium of market. In the tobacco example, by adding
more taxes per unit of output of production, this will shift the supply curve of tobacco
productions to the left from S1 to S2 and move to the new efficient market equilibrium point
E2 where taxes were imposed(Layton et al.,2016).
It is clearly to see that there are lots of benefits when imposing the carbon taxes on the
pollutant of producers. On of the most advantage that it encourages the firms to reduce the
using of resources as well as the cost of input or margin cost as they will be able to gain the
profit maximization to do so.
Another solution that government could take into account is the regulation. By setting a limit
of the emission standard, this can make the firms produce fewer products and tend to use
other technologies of production to reduce the pollution. Moreover, this may force the firms
invest more money to do so or increase the cost of a unit of output, as the result the original
supply curve of S1 shifts to the left to S2 and will gain a point of E2 where efficient
equilibrium is established(Perloff,2012).
Although the solution can encourage the firms produce less pollution and allocate the
efficient market, there are many disadvantages when doing so. First, there may be biased for
them interest groups which want to expand their alternative energy technologies. In addition,
some green energy can be more costly and have negative effects on the economy rather than
use old technologies which produce at an allowance of carbon emission(Layton et al.,2016).

IV. Case study of a negative externality

In Vietnam, there are many cases of negative externalities which cause extremely
environmental pollution issues and have a tremendous effect on social as well as the
economics of Vietnam in the long term. Do these significant cases such as Vedan ; Formosa
company shows that not only they impact on one area, but also they are affecting many areas
in the country. This essay will take Vedan as a particular case study to demonstrate for a case
of the negative externality in Vietnam.
Vedan Vietnam is a Taiwanese-owned enterprise of manufacture which has many plants and
factories across several territories. Their production line focused on a variety of food additive
products include Amino acids, substances of spicy food, starch products. One of the favourite
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products which common use in every Vietnamese households meal is known as monosodium
glutamate (Vedan Vietnam,2016). In 2008, the company was claimed for released directly
toxic and untreated waste water into Thi Vai river for 14 years (Vedan responsible,2010).
According to Doan Canh, a professor of environmental studies at Ho Chi Minh City Institute
for Tropical Biology Thi Vai river almost dead and there is no creature can live there with
polluted water (Environment-Vietnam,2008). It is estimated that around VND1.4 trillion
equivalent to US$75 million of losses that caused by the pollution on the southern farmers
(Vedan responsible,2010).
To deal with this problem, the government imposed many regulations to stop the companys
violation in the damage of environment. Addition, the authorities required Vedan should pay
more taxes and fines to remedy and resolve for social economy of local council and help the
farmers who live nearby the affected areas, in particular:
1. Vedan has to pay for VND267.5 million (US$) of fines in violation of
administrative contracts.
2. Charging a fee of VND127 billion (US$6.35 million) in environmental
protection with following Decision No.131/QD-XPHC in October 2008,
which imposed by the Chief Inspector of Natural Resources and
Environmental of administrative sanctions.
3. Vedan takes responsibility to pay the compensations for the destruction of
economy and environment in three major affected areas Ba Ria-Vung Tau,
Ho Chi Minh, Dong Nai with the amount of VND53.6 (US$2.68 million),
VND45.74(US$2.28 million), VND240 billion (US$12 million) respectively.
These compensations aim to help and support for households in affecting areas
to improve theirs living condition.
4. The requirement of installing and upgrading new and exist sewage systems
with the total capacity of 9.300 cubic meters and ensure that wastewater
treatments follow the

national

technical

standards (Reporting the

result,2010).
To illustrate the case of Vedan, the graph below will describe in details the market for
monosodium glutamate in Vietnam and the impact of the company having on socialenvironment when the negative externality occurs. Next, the result in deadweight loss will be
showed when the government takes involved action to allocate the market.
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Figure 5 demonstrate the market for monosodium glutamate produced by Vedan which its
plants discharged directly wastewater into Thi Vai River that killed the ecology system and
damaged the water of the river. In figure 5, the demand curve D and supply curve S1
established the normal of market equilibrium E1 for the market of monosodium glutamate. At
this point, the market is allocated inefficiently because the firm produces outputs over the
socials needs Q1with a low cost of product P1. As a result, there are arising the negative
externality costs which total of US$21.31 million. These costs are included the costs of
farmers business losses, destruction the rivers ecology, cost of clean-up the pollution (there
are US$6.35 of fee charging, US$16.96 of total compensation three provinces). The cleanup and management of the Thi Vai River basin, which has become heavily polluted, will cost
about VND30 billion (US$1.7 million)(Dang Quan,2009).
When the government took action by imposing the regulations, fines and compensations
which mentioned above, the firm produced at the supply curve S2 where there are included
external costs. Therefore, the efficiency of market equilibrium E2 was established with the
increase in price and quantity of outputs to P2 and Q2, respectively.

To examine that deadweight loss, it is clearly seen that each point on the supply curve for
goods can be shown the marginal cost of these products, or so-called the private marginal
cost, which less than the true marginal cost when a negative externality incurred, it is socalled marginal social cost.
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Figure 6 shows the marginal benefit to buyers when using the product of monosodium
glutamate. It also equals the market demand curve for monosodium glutamate. Following the
market of supply and demand law, the equilibrium market established at point E1 where
quantity produced is Q1. At this point, the production marginal benefit is smaller than the
marginal social cost of production and the marginal benefit equals marginal private cost but it
still smaller than social cost.
At the market equilibrium E2 where the marginal benefit equal to marginal cost and there the
quantity produced is Q2 which presents the efficient level of production. When moving away
this point, the deadweight loss is created because of the firm product over the societys need
and the cost to society greater than the social benefits. The triangle is determined by the
quantities of units which social costs over social benefits (Taylor&Frost,2008).

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References
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Dang Quan (2009). $1.7m needed to clean polluted Thi Vai River. Vietnam
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