Micro Economics Assignment

PRINCIPLES OF MICRO ECONOMICS EC0 2013 PRINCIPLES OF MICRO ECONOMICS ECO 2013

1.0 Introduction

According to Amos Web, a market characterized by a single buyer of a product. Monopsony is the buying-side equivalent of a selling-side monopoly. Much as a monopoly is the only seller in a market, monopsony is the only buyer. While monopsony could be analyzed for any type of market it tends to be most relevant for factor markets in which a single firm is the only buyer of a factor. Two related buying side market structures are oligopsony and monopsonistic competition.

Monopsony is a market in which a single buyer completely controls the demand for a good. While the market for any type of good, service, resource, or commodity could in principle function as monopsony, this form of market structure tends to be most pronounced for the exchange of factor services.

While the real world does not contain monopsony in its absolute purest form,labormarkets in which a single large factory is the dominate employer in a small community comes as close as any other.

Like a monopoly seller, a monopsony buyer is a price maker with complete market control. Monopsony is also comparable to monopoly in terms of inefficiency. Monopsony does not generate an efficient allocation of resources. The price paid by a monopsony is lower and the quantity exchanged is less than with the bench market of perfect competition.

.DIPLOMA IN BUSINESS MANAGEMENT 6 2.0 Characteristics of Monopsony

The three key characteristics of monopsony are a single firm buying all output in a market, no alternative buyers, and restrictions on entry into the industry.

1. Single Buyer: First and foremost, a monopsony is a monopsony because it is the only buyer in the market. The word monopsony actually translates as "one buyer." As the only buyer, a monopsony controls the demand-side of the market completely. If anyone wants to sell the good, they must sell to the monopoly.

2. No Alternatives: A monopsony achieves single-buyer status because sellers have no alternative buyers for their goods. This is the key characteristics that usually prevent monopsony from existing in the real world in its pure, ideal form. Sellers almost always have alternatives.

DIPLOMA IN BUSINESS MANAGEMENT 73. Barriers to Entry: A monopsony often acquires and generally maintains single buyer status due to restrictions on the entry of other buyers into the market. The keybarriers to entryare much the same as those that exist for monopoly: (a) Government license or franchise (b) Resource ownership (c) Patents and copyrights (d) High start-up cost(e) Decreasing average total cost

DIPLOMA IN BUSINESS MANAGEMENT 83.0 Competition of the Market

A market structure characterized by a large number of small buyers, that purchase similar but not identical inputs, have relative freedom of entry into and exit out of the industry, and possess extensive knowledge of prices and technology. Monopsony competition is the buying-side equivalent of a selling-side monopolistic competition. Much as a monopolistic competition is a competitive market containing a number of small sellers, monopsonistic competition is a market containing a number of small buyers. While monopsony competition could be analyzed for any type of market it tends to be most relevant for factor markets. Two related buying-side market structures are monopsony and oligopsony.

Monopsony competition is amarketin which a large number of relatively small buyers purchase goods (usually factor inputs) that are similar but not identical. While the market for any type of good, service, resource, or commodity can, in principle, function as monopsony competition, this form of market structure tends to be most pronounced for the exchange of factor services.

This market structure is the somewhat obscure and less noted buying counterpart ofmonopolistic competition. However, monopsony competition tends to be just as prevalent in the real world. In fact, firms operating as monopolistic competition in an output market often operate as monopsony competition in an input market.

DIPLOMA IN BUSINESS MANAGEMENT 9

In much the same way the monopolistic competition is a cross between perfect competition andmonopoly, monopsonistic competition is a cross between perfect competition and monopsony. While each monopolistically competitive buyer has very little market control, it does have some market control, each has its own little monopsony, and each faces an input supply curve that is relatively elastic but not perfectly elastic.

DIPLOMA IN BUSINESS MANAGEMENT 104.0 Factor Market Analysis

The analysis of a factor market characterized by monopsony indicates that the single buyer maximizes profit by equating marginal revenue product to marginal factor cost. This results in a lower price and smaller quantity than achieved with perfect competition. As such, it does not achieve an efficient allocation of resources. Monopsony is combined with monopoly to form a bilateral monopoly market structure.

Monopsony is a market dominated by a single firm buying the product. Monopsony is the buying-side equivalent of a selling-sidemonopoly. Much as a monopoly is the only seller in a market, monopsony is the only buyer. While monopsony can be analyzed for any type of market, it tends to be most relevant for factor markets in which a single firm does all of the buying of a factor of production.

Comparable to a monopoly seller, a monopsony buyer is aprice makerwith completemarket controlon the buying side of the market. Monopsony is also comparable to monopoly in terms ofinefficiency. Monopsony does not generate an efficient allocation of resources. The price paid by a monopsony is lower and the quantity exchanged is less than would be had byperfect competition.

DIPLOMA IN BUSINESS MANAGEMENT 114.1 A Hypothetical Example

One example of a monopsony factor market is the hypothetical Natural Ned Lumber Company, which is a lumbering operation in the isolated Jagged Mountains region north of the greater Shady Valley metropolitan area. The Natural Ned Lumber Company is an expansive operation employing several thousand workers, all of whom reside in Lumber Town, which is adjacent to the Natural Ned Lumber Company lumbering operations. In fact, everyone is living in Lumber Town works for the Natural Ned Lumber Company.This makes the Natural Ned Lumber Company a monopsony employer. If anyone in Lumber Town seeks employment, then they must seek it with the Natural Ned Lumber Company. As such, the Natural Ned Lumber Company is a price maker when it comes to buying labor services. The Natural Ned Lumber Company can the determine of labor services desired, then charge the minimumfactor pricethat sellers are willing and able to receive.While the Natural Ned Lumber Company and Lumber Town is obviously a fictitious example of a monopsony, it does illustrate one of the more prevalent categories of monopsony that existed in the early history of the U.S. economy--the company town. During the early days of the U.S. industrial revolution, the late 1800s through the early 1900s, it was quite common for a large industrial facility (factory, mining operation, lumber company) to dominate employment in a given area. In some cases, the company literally built and owned the town in which the workers lived. Even those people who did not work directly in the primary activity (mining, lumber, etc.) worked in the company-owned store, hospital, school, or theater. Hence the term company town.

DIPLOMA IN BUSINESS MANAGEMENT 124.2 Modern Monopsony

Like other extreme market structures (perfect competition and monopoly) monopsony is only approximated in the real world. Achieving the status of THE ONLY BUYER is not easy. Few if any buyers actually achieve this status. However, several have come close. In modern times a few examples of markets that come very close to monopsony come from the world of sports.

Should a talented quarterback wish to obtain a job as a professional football player, then THE employer is the National Football League (NFL). Of course, the NFL is not absolutely the ONLY employer. Employment as a professional football player can also be found with the Canadian Football League (CFL). However, sufficient difference exists between these two employers to give the NFL significant monopsony control.

Similar near monopsony status exists for other professional sports. A professional baseball player seeks employment with Major League Baseball (MLB), with minimal competition from Japan. A profession basketball player seeks employment with the National Basketball Association (NBA), with minimal competition from Europe. A profession hockey player seeks employment with the National Hockey League (NHL), again with some competition from Europe.

DIPLOMA IN BUSINESS MANAGEMENT 13 Other modern markets that exhibit varying degrees of monopsony status can be found in collegiate sports and the National Collegiate Athletic Association (NCAA) and the medical profession and the American Medical Association (AMA). Much like a professional football, baseball, basketball, or hockey player seeks employment in the "big leagues," a collegiate athlete seeks "employment" with a college affiliated with the NCAA. In a similar manner, a physician seeks "employment" through the AMA.

The reasons for quotation marks around employment for these two examples are that the monopsony employer does not technically employ these workers in a traditional sense. Monopsony status, however, is attributable to the ability to influence the factor market. In other words, a collegiate athlete who does not satisfy NCAA guidelines has difficulty "working" for a university that is providing athletic entertainment services through the college in return for a scholarship. A physician who does not satisfy AMA guidelines also has difficulty working at a hospital or in private practice.

DIPLOMA IN BUSINESS MANAGEMENT 144.3 Supply and Cost

Single-buyer status means that monopsony faces a positively-slopedsupply curve, such as the one displayed in the exhibit to the right. In fact, the supply curve facing the monopsony is the market supply curve for the product.

The far right curve in the exhibit is theredsupply curve (S) facing the monopsony. The far left curve is the blue marginal factor cost curve (MFC). The marginal factor cost curve indicates the change intotal factor costincurred due to buying one additional unit of the good.

Because a monopsony is a price maker with extensive market control, it faces a positively-sloped supply curve. To buy a larger quantity of output, it must pay a higher price. For example, the monopsony can hire 10,000 workers for a wage of $5. However, if it wants to hire 20,000 workers, then it must raise the wage to $6.10.

For this reason, the marginal factor cost incurred from hiring extra workers is greater than the wage, or factor price. Suppose for example that the factor price needed to hire ten workers is $5 and the factor price needed to hire eleven workers is $5.10. The marginal factor cost incurred due to hiring the eleventh unit is $6.10. While the $6 factor price means the monopsony incurs a $5.10 factor cost from hiring this worker, this cost is compounded by an extra cost of $1 due to the higher wage paid to the first ten workers. The overall increase in cost, that is marginal factor cost, is thus $6.10 (= $5.10 + $1). DIPLOMA IN BUSINESS MANAGEMENT 15

DIPLOMA IN BUSINESS MANAGEMENT 165.0 Monopsony Cost and Revenue

An example that can illustrate a monopsony factor market is provided by the Natural Ned Lumber Company. This is a hypothetical lumbering operation in the isolated Jagged Mountains region north of the greater Shady Valley metropolitan area. The Natural Ned Lumber Company is an expansive operation employing thousands of workers, all of whom reside in Lumber Town, which is adjacent to the Natural Ned Lumber Company lumbering operations. In fact, everyone living in Lumber Town works for the Natural Ned Lumber Company.

This makes the Natural Ned Lumber Company a monopsony employer. If anyone in Lumber Town seeks employment, then they must seek it with the Natural Ned Lumber Company. This makes the Natural Ned Lumber Company a price maker when it comes to buying labor services. The Natural Ned Lumber Company can determine the quantity of labor services desired, then charge the minimum factor price that workers are willing and able to receive.

This diagram displays the market for labor services in Lumber Town. The vertical axis measures the factor price (wage rate) and the horizontal axis measures the quantity of labor services (number of workers). The key for any monopsony buyer like the Natural Ned Lumber Company, is that the supply curve it faces for hiring labor is The market supply curve for the factor.





Supply: The resulting curve, labeled S, is positively sloped, indicating that workers require a higher wage to increase the quantity supplied. More to the point, if Natural Ned wants to hire more workers, it must pay a higher wage. This supply curve is also theaverage factor costcurve for Natural Ned.

Marginal Factor Cost: As a profit-maximizing monopsony with market control, the Natural Ned Lumber Company does not achieve an efficient allocation of resources. This results because marginal revenue product is not equal to the factor price. While the Natural Ned Lumber Company pays a factor price of $8.40 per hour, marginal revenue product is $13 per hour.

Marginal Revenue Product: The other half of Natural Ned's profit-maximizing decision ismarginal revenue product. Marginal revenue product indicates the change in revenue resulting from hiring one additional worker. This curve is negatively-sloped because marginal revenue product is based onmarginal physical productwhich declines with extra employment due to of thelaw of diminishing marginal returns. Because each additional worker is less productive, each additional worker generates less extra revenue.

DIPLOMA IN BUSINESS MANAGEMENT 215.1 Profit Maximizing Employment

All of the information needed to identify the quantity of workers that maximizes Natural Ned's profit is in hand. The profit-maximizing employment is the quantity that equates marginal factor cost and marginal revenue product, which is the intersection of the MFC and MRP curves. The profit-maximizing quantity of employment is 37,000 workers.

Why is this profit maximization? Should Natural Ned hire fewer than 37,000 workers, then marginal revenue product is greater than marginal factor cost. An extra worker contributes more to revenue than it adds to cost. This increases Natural Ned's profit. Natural Ned should hire any worker with a marginal revenue product that exceeds marginal factor cost.

Should Natural Ned hire more than 37,000 workers, then marginal revenue product is less than marginal factor cost. An extra worker contributes less to revenue than it adds to cost. This decreases Natural Ned's profit. Natural Ned should fire any worker with a marginal revenue product that is less than marginal factor cost.

Should Natural Ned hire exactly 37,000 workers, then marginal revenue product is equal to marginal factor cost. The last worker hired contributes as much to revenue as to cost. This keeps Natural Ned's profit constant. Natural Ned should hire workers up to the point that marginal revenue product is equal to marginal factor cost, but no more.


Once Natural Ned identifies the profit-maximizing employment, the final step is to determine how much to pay each worker. This information is found on the market supply curve (S). According to the market supply, a wage of $8.40 is sufficient to entice 37,000 workers to supply their labor services. Because Natural Ned is a monopsony, it needs to pay no more than this wage.

DIPLOMA IN BUSINESS MANAGEMENT 235.2 Inefficiency

As a profit-maximizing monopsony with market control, the Natural Ned Lumber Company does not achieve an efficient allocation of resources. This results because marginal revenue product is not equal to the factor price. While the Natural Ned Lumber Company pays a factor price of $8.40 per hour, marginal revenue product is $13 per hour.

This difference between factor price and marginal revenue product is a prime indicator of inefficiency. Marginal revenue product is thevalueof the good produced. Factor price is theopportunity costof production, the value of goods not produced. If the two are equal, then the value of the good produced is equal to the value of goods not produced. Society cannot generate more overallsatisfactionby producing more or less of the good.

However, for a monopsony like Natural Ned, marginal revenue product is greater than factor price. In this case, the value of the good produced is greater than the value of goods not produced. Society can generate more overall satisfaction by producing more of the good.

Because profit maximization means marginal revenue product is equal to marginal factor cost, and because marginal factor cost is greater than factor price, marginal revenue product is also greater than factor price for monopsony. A profit-maximizing monopsony does not, will not, cannot, efficiently allocate resources.

DIPLOMA IN BUSINESS MANAGEMENT 246.0 The Other Three Market Structures

Monopsony is one of four market structures that arise in the analysis of factor markets. The other three are: perfect competition, oligopsony, and monopsonistic competition. The exhibit to the right illustrates how these four market structures form a continuum based on the relative degree of market control and the number of competitors in the market. At the far right of the market structure continuum is monopsony, characterized by a single buyer and extensive market control.

Market Structure Continuum

Perfect Competition: To the far left of the market structure continuum is perfect competition, characterized by a large number of relatively small competitors, each with no market control. Perfect competition is an idealized market structure that provides a benchmark for evaluating the efficiency of the other market structures.


Oligopsony: In the middle of the market structure continuum, residing closer to monopsony is oligopsony, characterized by a small number of relatively large competitors, each with substantial market control. This is the buying-side counterpart of oligopoly on the selling side. A substantial number of real world markets fit the characteristics of oligopsony.

Monopsonistic Competition: Also in the middle of the market structure continuum, but residing closer to perfect competition, is monopsonistic competition, characterized by a large number of relatively small competitors, each with a modest degree of market control. This is the buying-side counterpart of monopolistic competition on the selling side. A substantial number of real world markets fit the characteristics of monopsonistic competition.

DIPLOMA IN BUSINESS MANAGEMENT 267.0 ConclusionThe models of this topic have been highly stylized with assumptions for analytical convenience more than for realism. Nonetheless, they do convey the essence of a labor market with frictions in which employers set wages influenced in part by competition from other employers but in which this competition is not to cutthroat as to enable workers to extract all the surplus from the employment relationship, nor so feeble as to enable employers to get all the surplus.

A lot of analysis in this topic has been very formal. But, one should not allow this to distract attention away from the basic insights into the workings of labor markets that the monopsonistic approach provides. The rest of this concerned with the determinants of prices and quantities in the labor market, a traditional pre-occupation of microeconomics. The study of prices is essentially the study of the distribution of wages while the study of quantities is the study of the level and distribution of unemployment, the level of employment in firms, and of the quality of labor ( as influenced by the acquisition of human capital ). These implications of monopsony are summarized briefly for these issues.

These conclusions then justify the approach in the rest of the book which is to use the perspective of employer market power to understand a wide variety of labor market phenomena, without making any value judgement as to whether the world could be improved by an appropriate policy intervention.

DIPLOMA IN BUSINESS MANAGEMENT 27References

http://books.google.com.my/books?id=AMMeAgAAQBAJ&pg=PA49&lpg=PA49&dq=end+of+MONOPSONY&source=bl&ots=A9rp3-8UXf&sig=-swW3QMK9TqDB48ZMdpriv4Rg5E&hl=en&sa=X&ei=8_jUUufqJsj_iAfpyIDICg#v=onepage&q=end%20of%20MONOPSONY&f=falsehttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=multiplier,%20aggregate%20markethttp://www.investopedia.com/tags/microeconomics/http://www.economics.utoronto.ca/jfloyd/modules/lmcm.htmlhttp://www.econpage.com/301/handouts/labormkts/labor2.html^Kulbacki, James W. (April 1992)."A Look at the Space Industry".Industrial College of the Armed Forces(ADA262201): 32. "The space industry can be characterized as both an Oligopoly and a Monopsony."Jump up^Kerr, Prue;Harcourt, Geoff(2002).Joan Robinson: Critical Assessments of Leading Economists. Taylor & Francis. pp.23.ISBN0-415-21743-1


WINFIELD INTERNATIONAL COLLEGESCHOOL OF BUSINESS MANAGEMENTDIPLOMA IN BUSINESS MANAGEMENTPRINCIPLES OF MICRO ECONOMICSECO 2014

OBJECTIVE In the purely competitive labor market described in the preceding section, each employer hires too small an amount of labor to influence the wage rate. Each firm can hire as little or as much labor as it needs, but only at the market wage rate, as reflected in its horizontal labor supply curve. The situation is quite different when the labor market is amonopsony, a market structure in which there is only a single buyer. A labor market monopsony has the following characteristics:

There is only a single buyer of a particular type of labor.

The workers providing this type of labor have few employment options other than working for the monopsony, because they are either geographically immobile or because finding alternative employment would mean having to acquire new skills.

The firm is a wage maker, because the wage rate it must pay varies directly with the number of workers it employs.

DIPLOMA IN BUSINESS MANAGEMENT 5ARTICLES ON MONOPSONY

PERMANENT LINK| FEBRUARY 22, 2013The Minimum Wage and MonopsonyDavid HendersonPRINTEMAILSHARE

Bowles-Simpson: Don't Fight th...Henderson on Responsibility fo...

There's been a fair amount of discussion on the web lately (hereandhere, for instance) about the minimum wage and monopsony. As is well known in economics, a skillfully set minimum wage, in the presence of monopsony in the labor market, can actuallyincreaseemployment. I don't have a graphical proof handy but I expect that many labor economics texts have such a graphical proof.Here's the proof in words. To say that a firm has monopsony power is to say that the supply curve of labor to the firm is upward-sloping. That is, the firm is not a price-taker in the labor market. So when the firm that employs n workers and pays Wn per worker wants to hire one additional worker, it needs to pay more to each worker than it paid when it hired n workers. Call this new wage Wn + x. But that means that the cost of hiring that n + 1st worker is not the wage, Wn + x, that the firm pays the worker: it's that wage, Wn + x, plus x times n. The reason: it pays all the other n workers that increment, x, also. Because the firm recognizes this, it hires up to the point where the value of marginal product = Wn + x + x*n. Now, if the government skillfully sets a minimum wage a little above Wn + x, the firm knows that it can't reduce the wage by hiring fewer people and also knows that it won't raise the wage by hiring a few more people and so it hires more people.The main reason people started talking about monopsony in the context of the minimum wage in the 1990s was the study, and later the book, by David Card and Alan Krueger. They were trying to explain why they found their result, which was that an increase in the minimum wage in New Jersey, while the minimum wage in Pennsylvania held constant, did not decrease employment in fast food restaurants in New Jersey relative to in Pennsylvania. Various people, most notably David Neumark and William Wascher, criticized the Card/Krueger data and, using better data, found the more-standard result. I don't want to get into that here.Instead, I want to note something about the monopsony explanation. Here's what I wrote in my review of their book:

DIPLOMA IN BUSINESS MANAGEMENT 29What would have to be true for the minimum wage not to destroy jobs? As George Stigler (1946) pointed out in his seminal article on minimum wages, if the employer has monopsony power in the labor market, a skillfully set minimum wage can actually increase employment. Card and Krueger are aware of this exception, and they speculate in Chapter 11 that the market for unskilled labor is indeed monopsonistic. How could the market for unskilled labor be monopsonistic when so many employers are competing for unskilled labor? Card and Krueger have a few answers and, at the same time, no answers. They discuss (pp. 373-83) various models in which firms set different wage rates for the same quality of labor, but they don't ever say which model they think explains their results. In two models they analyze, some firms set high wages and workers respond with lower turnover, while other firms set lower wages and accept higher turnover. A minimum wage, then, could reduce turnover at the low-wage firms. Card and Krueger claim that lower turnover implies higher average employment. I don't think so. There's reason to believe that employment would, on average, be lower. Presumably, low-wage, high-turnover employers believed themselves to be maximizing profits. That is, the loss from the increment of turnover was less than the loss from paying higher wages to avoid that increment of turnover. Given that assumption, when the government steps in and imposes a minimum wage, the net cost of an employee is higher. By the law of demand, the employer will hire fewer employees.Interestingly, Card's and Krueger's own data on price contradict one of the implications of monopsony. If monopsony is present, a minimum wage can increase employment. These added employees produce more output. For a given demand, therefore, a minimum wage should reduce the price of the output. But Card and Krueger find the opposite. They write: '[P]retax prices rose 4 percent faster as a result of the minimum-wage increase in New Jersey...' (p. 54). If their data on price are to be believed, they have presented evidenceagainstthe existence of monopsony. David R. Henderson, "Rush to Judgment,"MANAGERIAL AND DECISION ECONOMICS, VOL. 17, 339-344 (1996)


October 3, 2010The Problem with a Health Care MonopsonyByJeffrey M. Spiers

Americans detest monopolies.And rightly so.Theoretically, monopolies represent an inefficient allocation of scarce resources. The monopolist is adept at converting consumer surplus into producer surplus since fewer goods are produced at a higher price. Remember long-distance telephone services? Under Ma Bell, prices were higher and services anemic. Today, the cost of long-distance telephone service is inconsequential. Americans tend to value increased competition and fear monopoly power.

The monopolist has the luxury of producing fewer goods or services while charging a higher price. In this country, "uncompetitive" equates to "un-American." We not only desire competition; we expect it. The competitive free market produces a surplus that society has come to expect and enjoy in the United States.

But one man's surplus is the Leftists' excess. And to the Left, excess is to be avoided.Think greed, avarice, inefficient, unfair.

The rhetoric used against insurers in recent days makes it seem like the executive branch is back to monopoly-busting, giving the impression that they are performing a public service. But with over 1,300 health insurers in this country, rationality dictates that we describe the existing marketplace in terms that approachcompetitiverather thanmonopolistic.In the six months since President Obama signed health reform into law, competition has decreased. Unable to meet health reform law requirements, smaller, regional health insurers have merged or have been acquired. As a result, fewer insurers exist today than six months ago. This outcome squarely contradicts what the administration claimed; fewer insurers mean less competition among insurers.


The health insurance marketplace will continue to contract. Witness last week's beat-down on insurers who dared justify 1% to 9% premium increases to compliance with the new law. Secretary Sebelius has a list and will be checking it twice! This unfriendly, adversarial relationship between the government and health insurers will eventually cause insurers to exit the marketplace altogether. Rather than be saddled with increased financial risks without the ability to price health policies accordingly, insurers will simply remove themselves from the spotlight of public humiliation and financial ruin.

In this new environment of fewer and fewer willing (and compliant) health insurers, what will happen to the cost of health services and health insurance? The answer lies not with the economics of a monopoly, but with the economics ofmonopsony power. A monopoly is the singlesellerof a well-defined good or service for which there are no close substitutes in the marketplace. A monopsony is the singlebuyerof a good or service. The accompanying graph illustrates the economic outcome of the monopsony model using inpatient hospital days as a basis for comparison.

Point C represents equilibrium in a competitive marketplace. Price PCis the market clearing price for quantity of inpatient hospital days demanded QC. With a single buyer of hospital inpatient services, the monopsonist must pay a higher price for all additional services as represented by the marginal factor cost curve (MFC) because he must negotiate the cost of inpatient days in advance. To compensate, our monopsonist reduces the price from PC toPMby reducing quantity supplied from QC toQM,otherwise known as "rationing." Monopsony power suggests a single buyer pays a lower price but purchases a lower quantity than the competitive marketplace would support. Who can argue with lower prices?


But will society actually see a price reduction in health insurance? This is doubtful. In the monopsonist model, we assumed demand and supply were static. Health reform will add some 30 million to the insured rolls, which will translate to increased demand. Health reform has also thinned the ranks of providers translating to decreased supply. Here's the monopsonist graph again with these two adjustments:

With supply reduced and demand increased, the competitive marketplace equilibrium shifts to point C*. Marginal factor costs are still higher than the new supply curve, forcing the monopsonist to pay more hospital stays. To compensate, quantity is reduced from QCto QM*, reflecting the profit maximization price PM*. The net effect of ObamaCare will be fewer insurers leading to a government-run, single-payer monopsony health care system; fewer services provided by the system (with still fewer providers); and higher prices paid by all.

The societal cost of a single-payer health system is the dead-weight loss of the formerly enjoyed surplus provided by a competitive market compounded with increased costs. This outcome is identical to that of the monopoly: higher prices paid for fewer services from fewer providers. Adam Smith was right. Free markets provide the most societal good in the most efficient manner. This is why Americans detest monopolies. But you already knew that. What you didn't know is that Americans also hate monopsonies.on "The Problem with a Health Care Monopsony"


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