Answer to Question #205793 in Economics of Enterprise for Malik ismail

Question

Q1: The production process in the oil industry is capital-intensive. The pollution it generates means it is one cause of environmental market failure. The Nigerian government intends to split the monopoly firm into separate companies to improve efficiency.

(a)           Identify two features of a capital-intensive production process.                  

(b)     Discuss whether or not removing a firm’s monopoly power will benefit consumers.                                  

Answer 1

(a)

The production which heavily relies upon capital goods like machines

i) Uses less labor

ii) relies less on other production factors

(b)

Why it might

Improvement in quality is likely to occur because firms will innovate to win customers. Competition will also force firms to be more efficient in order to survive. Firms will also reduce costs to remain competitive and they will also invest in research and development to maintan market share.

Consumers will have more choice leading to improved competition and consequently prices will fall increasing consumer's real disposable income.

Why it might not

A monopoly firm is able to maximize on economies of scale reducing average production costs. The removal of power of a monopoly may increase the production costs hence consumers will be forced to pay higher prices thereby reducing the consumer's welfare.

Consumers could rely on monopoly reputation for customer service and quality. Large room of choice would inconvenience and confuse consumers. The firm could also be state owned which means it would take into account full social costs therefore charging low prices to make products affordable.