Methods Lab2 Market Failure and Evidence Evaluation

Methods Lab2: Market Failure and Evidence Evaluation

MethodsLab2: Market Failure and Evidence Evaluation

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PolicyBrief #1 – Market Composition:

Hirschman-Herfindahl Index (HHI)

Firm Name

Sales (million)

Market%

Market-Squared

Comcast Corporation

22.31

25.90%

497.7361

Direct TV

20.28

23.54%

411.2784

Dish Network

13.93

16.17%

194.0449

Time Warner Cable

10.98

12.75%

120.5604

AT &ampT

5.97

6.93%

35.6409

Verizon

5.77

6.70%

33.2929

Charter

4.26

4.95%

18.1476

Cable Vision

2.64

3.06%

6.9696

Total

86.14

100.00%

1317.6708

TheHirschman-Herfindahl Index (HHI) value is 1317.6708. This means thatthe market share is moderately concentrated. Based on the HHI resultsthe market is safe and there is no need to introduce regulations intothe marker as the competition is moderately concentrated.

ProposedMerger.

Hirschman-Herfindahl Index (HHI)

Firm Name

Sales (million)

Market%

Market-Squared

Merger

Comcast Corporation + Times Warner Cable

33.29

38.65%

1108.2241

Direct TV

20.28

23.54%

411.2784

Dish Network

13.93

16.17%

194.0449

AT &ampT

5.97

6.93%

35.6409

Verizon

5.77

6.70%

33.2929

Charter

4.26

4.95%

18.1476

Cable Vision

2.64

3.06%

6.9696

Total

86.14

100.00%

1807.5984

Thenew HHI value after the merger is 1807.5984 from the initial 1317.6708. This means that the change difference of the HHI value is489.9276. The standard value that suggests that a merger is likely tohave safe effects on the market share should be below 100 for amoderately concentrated market such as this one. However, in thiscase the change is more than 100. Therefore it is unsafe to conductthe merger and more research studies should be done to determine thereasons for the imbalance.

PolicyBrief #2 – Externalities:

Inan efficient market the demand and supply functions are atequilibrium. This therefore means that:

Demand:Q = 20,000-100P (alternatively P=200-.01Q)

Supply:Q = -500+50P (alternatively P=10+.02Q)

Demand= Supply.

20,000– 100P = -500 + 50P

20,000+ 500 = 100P + 50P

20,500= 150P

P= 137.67

Q= 20,000 – 100(137.67)

Q= 20,000- 13,767

Q= 6233

Thistherefore means that at equilibrium the quantity of oil per barrelsproduced per day is 6233 at a price of $137.67 per barrel.

Consumersurplus

6233= -500 + 50P

50P= 6233 – 500

P= 114

ConsumerSurplus is therefore given by: $ 137 – $114 = $ 23 per day.

Producersurplus.

P= 200 – 0-1Q

P= 200- 623.3

P= 423.3

423– 137 = 286.3

Theproducer surplus is therefore $ 286.3 per day.

Theextra cost resulting from the inefficiencies is estimated at $50 perbarrel. This inefficiency will have a negative impact on the overallquantity of oil because it increases the oil production cost. Thisends up increasing the price of oil in the market as the producers tocompensate for the inefficiency. As a result the overall quantity ofoil consumed is therefore reduced.

PolicyBrief #3 – Data Analysis

Ohio

California

Texas

31,889

401,946

46,897

31,890

401,947

46,898

31,891

401,948

46,899

31,892

401,949

46,900

31,893

401,950

46,901

31,894

401,951

46,902

31,895

401,952

46,903

31,896

401,953

46,904

31,897

401,954

46,905

31,898

401,955

46,906

31,899

401,956

46,907

31,900

401,957

46,908

31,901

401,958

46,909

31,902

401,959

46,910

31,903

401,960

46,911

31,904

401,961

46,912

31,905

401,962

46,913

31,906

401,963

46,914

31,907

401,964

46,915

31,908

401,965

46,916

31,909

401,966

46,917

31,910

401,967

46,918

31,911

401,968

46,919

31,912

401,969

46,920

31,913

401,970

46,921

31,914

401,971

46,922

31,915

401,972

46,923

31,916

401,973

46,924

31,917

401,974

46,925

31,918

401,975

46,926

31,919

401,976

46,927

31,920

401,977

46,928

31,921

401,978

46,929

31,922

401,979

46,930

31,923

401,980

46,931

31,924

401,981

46,932

31,925

401,982

46,933

31,926

401,983

46,934

31,927

401,984

46,935

31,928

401,985

46,936

31,929

401,986

46,937

31,930

401,987

46,938

31,931

401,988

46,939

31,932

401,989

46,940

31,933

401,990

46,941

31,934

401,991

46,942

31,935

401,992

46,943

31,936

401,993

46,944

31,937

401,994

46,945

31,938

401,995

46,946

Total.

1,595,675

20,098,525

2,346,075

Mean

31,914

401,971

46,922

Median

31,913

401,970

46,921

Minimum value

31,889

401,946

46,897

Maximum value

31,937

401,994

46,945

Fromthe analysis of the data given we can conclude that California is thestate with the highest oil produced per day while Ohio has the leastoil produced per day. This therefore means that California should bethe state that should receive the highest amount of tax moneyfollowed by Texas and lastly Ohio.