Public Finance - Assignment Example

Public Finance Affiliation Public Finance A Perfect competition is a market structure that achieves an efficient allocation of resources. Subsequently, this efficiency is achieved by having the equality between marginal cost (MC) and price (P). The wine industry in question is a perfectly competitive firm. This is because it has homogeneous products, several small firms, enough knowledge of prices, and freedom to entry. In this case, the resources will be allocated effectively ensuring that the amount is equal to the marginal cost, (Bills, Farrell, & Hill, 1967).

The graph above elaborates the efficiency of profit maximization in the wine industry. The point E shows the equilibrium point where P=Q. Subsequently, this is the point where the Marginal Revenue is equal to the Marginal Cost. This means that the value of the wine produced is virtually equal to the wine not produced hence an efficient output, Solow (1998).In the event where the wine industry is consolidated into a large monopoly firm, the unit price of wine will rise to $ 7 per bottle with 75000 bottles produced.

Monopolists are price makers since they do not face any competition. Therefore, the monopoly is at will to increase the prices to $7, a $2 increase. With this effect, their demand curve is price inelastic. Therefore, monopolists try to maximize profits by setting output at the point where MR=MC, Telser (1987).In the monopoly created by the consolidation of the wine companies, the output will not be efficient as shown in the graph below:Point X shows the price that is adjusted upwards by the monopoly.

In this case, it is $ 7. Subsequently, point E represents the equilibrium where MR=MC with 75000 units produced. In this case, therefore, the output is not efficient since the price is greater than the Marginal Cost. This means that the utility obtained from wine consumption is greater than the utility forwent, Nikaidō (1975). Additionally, the shaded area in the graph represents the loss in the net benefits due to a subsequent reduction in production and utility, Triffin (1940). In conclusion, the efficient output represents the optimal utility and the best profit margins that a firm can achieve.

ReferencesBills, M. A., Farrell, A. C., & Hill, H. B. (1967). Measuring office output. New York: Kraus Reprint Corp.Nikaidō, H. (1975). Monopolistic competition and effective demand. Princeton, N.J: Princeton University Press.Solow, R. M. (1998). Monopolistic competition and macroeconomic theory. Cambridge: Cambridge University Press.Telser, L. G. (1987). A theory of efficient cooperation and competition. Cambridge: Cambridge University Press.Triffin, R. (1940). Monopolistic competition and general equilibrium theory.

Cambridge: Harvard University Press.