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Technological Change and Markets & The Case For Public Ownership of Utility Companies.

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(a) Explain how technological change has affected the structure and competitiveness of markets such as those for telephone services, recorded music or cars. (15 marks) Technological change is defined as where new innovation and development in technology has allowed new technology to be create or existing technology to be upgraded. An example of technological change is the introduction of fibre optics compared to old technology such as copper wires for the telephone line. Market competitiveness is defined as to the extent to which the sellers in the market compete not only on prices to provide the greater customer utility (via allocative efficiency where there is no consumer surplus) but also on non-price competition such as providing greater support for consumers to enable their product to be more competitive based on consumer satisfaction. For the telephone service, as stated in the quote, there used to be one main supplier of the market. This is therefore a form of a monopoly and this may be discouraging to consumers due to a restricted output and raised prices ? this is a form of allocative inefficiency as the monopolies are using consumer surplus in the form of greater profits and so the quantity produced is not at the socially desirable level. ...read more.


This is because, if we assume that the firms act in a more of a perfectly competitive manner, firms may choose to compete on price with each other, therefore assuming there are low barriers to entry within the market, the firms cannot make supernormal profit in the long run and so if they do, this will only attract new firms into the market. Therefore, the firms will be price takers based upon the socially optimum level and therefore this means that allocative efficiency occurs as no consumer surplus is extracted as the firms need to compete on prices as consumers can easily switch providers based on perfect information and so this should bring the price down. Also, the firms have to set the market clearing price and so as they produce on the lowest point of their average cost curve, this also promotes productive efficiency and so in the market, this may be beneficial as the private firms allocate resources where there are best utilised to gain the greatest customer satisfaction. This can be shown in the diagram below where both allocative and productive efficiency are shown in the perfectly competitive model. However, we are making a generalising assumption that the firms were compete on price within the utility market. ...read more.


Yet, as seen in the UK today, utility companies do act more in the form of a natural monopoly and this leads to the question whether this could be improved in the long run. Perhaps through correct government legalisation, this would allow companies to share facilities together such as fibre optics or copper cables, this would reduce the barrier to entry to enable new firms to enter the market to make it more into a competitive market structure. Yet, it is often ?easier said than done? as it is not simply the case of ensuring firms share infrastructure as laws need to be in place to begin with and these changes may actually deter existing firms to continue in the UK market. However, utilities are a necessity and so perhaps by using private sector firms which may promote innovation through research and development that may not be seen in a public firm, then the government may need to issue tougher penalties on firms that exploit their monopoly powers (such as charging higher gas prices even if the price of gas has fallen) and also ensuring there is tougher regulation. Thus, in order to make this regulation more efficient, perhaps the government should ensure that all utility companies are transparent in their finances to promote competition so they do not exploit their monopoly powers. ...read more.

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