Forman Christian College

(A Chartered University)
Department of Business
BUSN 121- Microeconomics
Final Assignment
Instructor: Sabeeh Ur Rahman Khan

Questions 1. Briefly write about two Monopolies operating in Pakistan. What is the role of
the Competition Commission of Pakistan and what steps the Government of Pakistan
and the legislature should take to encourage competition and discourage the use of
Monopolistic practices? (500 words)

A monopoly is a market structure where there is only a single seller who sells a unique product
or service in the market. In such a market structure, the firm has zero competition, as the firm is
the sole seller of goods or services with no close substitute.

Examples of pure monopolies in today’s world are rare. However, they do exist. Most of the
monopolies are government owned businesses.
Pakistan Railways is one good example of monopolies operating in Pakistan. Pakistan Rail
ways is a state-run transport service. Federal government of Pakistan has the firm under its
control, having the head quarter in Lahore. The firm has a monopoly over the rail system in
Pakistan. Among many other forms of transport, Pakistan Railways is an important source of
transportation throughout the country. Thousands of passengers use the service every day. The
firm offers cheap and safe mode of transportation for the passengers throughout the country. It
has helped the country to bridge the gap between farthest corners of the country which has
promoted education, business and tourism in the country. However, Pakistan Railways is facing
several challenges these days. Due to shortage of fuel and money, Pakistan Railways has
suspended many of its services. The firm is on a verge of financial collapse.

Similarly, another such monopoly in Pakistan is WAPDA. WAPDA stands for Water and Power
Development Authority. WAPDA is a state owned firm that is responsible for maintaining power
and water in Pakistan. Among its resources, WAPDA has both Terbela and Mangla dams. The
firm’s headquarters are based in Lahore. The firm has a monopoly of producing and providing
electricity in the country, however, Karachi is an exemption since the city is served by KESC
(Karachi Electricity Supply Corporation). WAPDA plans, constructs and operates power
generation in the country.

The Competition Commission of Pakistan (CCP) is an independent quasi-regulatory that is

responsible to ensure that companies in Pakistan face healthy competition for the betterment of
the economy. It ensures that no firm in the market unfairly uses its dominant position, introduces
different types of anti-competitive agreements in the market and encourage fair business
practices in the country. The commission also keeps an eye on mergers takeovers in the market
which may try to lower the competition. It provides a legal framework that fosters healthy
competition in the business world which results in an improved economic efficiency, and
protects consumers from unfair business practices.

Government of Pakistan can discourage monopolies to protect consumers in a number of

manners. Firstly, Imposition of tax can be introduced for the product/service the firm sells. The
government can either impose tax per unit or introduce a lump sum tax to the firm. This is will
ensure that output sold reduces or the firm’s profit reduces. Secondly, the government cann
impose price ceilings to monopolies, which will limit them to charge reasonable prices. This
would discourage such firms to invest such high capitals in a market where they can not
maximize their profits and they wouldn’t create high entry barriers for others. In order to
encourage competition, the Government can provide subsidies to people to ensure more and
more business activities are taking place. Similarly, the government can lower down the interest
rate in the economy, which will encourage more people to invest in businesses. This will lead to
an increased competition in the market.

Question 2. Is comparing the benefit of increased sales with the explicit cost of
advertising a good decision-making principle? (500 words)

Explicit cost is a cash payment made to others while running a business that represents cash
outflows in clear and distinct terms. Explicit costs include wages, mortgage, rent, utilities,
advertisements, raw materials, and other general, administrative, and sales costs. The condition
of explicit expenses is that it must be cash. Explicit cost is important if you are trying to create
long-term strategic goals for a firm or merely assessing its profitability. The explicit cost can be
easily determined and can be invaluable for decision-making in a business or department.
Explicit cost is essential. Explicit costs are calculated through this formula:
Explicit costs = cash outflows from the company's financial statement
They are generally easy to identify in the general ledger, and they are in the expenses listed on
the income statement. There are several reasons why the explicit cost is essential. Firstly, the
explicit cost is used to calculate profit. The net income is reflected in the revenue that it left after
all explicit costs have been charged. The one cost that businesses need to calculate net profit is
explicit cost, so it is clearly indicated. Secondly, it allows for long-term strategic planning. Since
explicit cost is used to calculate a company's profitability, it is a key metric for long-term
strategic planning within an organization.
Accounting profit is a cash concept. It means total revenue minus explicit costs - the difference
between money brought in and money paid out. Economic gain is total income minus total cost,
which comprises of both explicit and implicit costs. The difference is important for all businesses
because although a business pays income taxes on the bases of its accounting profit, whether
or not it is economically successful depends on its economic benefit.
Considering this, it is rightful to say that comparing explicit cost with advertising would be a
useful decision-making principle since the explicit cost of advertising has a direct and clear
relation with the revenue earned. If increasing advertising costs brings in more revenue, then it
is evident that the business is making a good return on investment and should continue
investing in advertising. Similarly, if the company is not witnessing an increased revenue despite
incurring advertising costs, it needs to reevaluate its decisions. However, this is a good idea just
in the short term. Speaking of the long run, the firm has to consider the implicit cost because the
ultimate goal of a firm is to be benefited economically.
Question 3. Give an example of Prisoner’s Dilemma which you had come across in real
life and how did you cope up with it? (500 words)
The prisoner's dilemma, known as game theory, refers to a situation, where a person must
choose between self-benefit and mutual benefit. The reason why this example is so famous is
that it relates to many real-life phenomena in which individualistic behaviors lead to negative
outcomes for society. It is often observed that people do what’s best for themselves when put in
similar situations, taking what other people around them are doing. Explaining it in economic
terms, individuals are ‘best responding’ to the perceived actions of others around them in a
purely self-interested self-beneficial way. However, by choosing self-benefit, most of the time it
is observed that an individual comes face to face with a losing situation i.e. he or she doesn’t
benefit at all. We all face this dilemma in different walks of life.

Speaking of this, a certain incident that I went through last semester came to mind. I took PHIL
101 at university. My psychology teacher carried out a class activity to elaborate Prisoner’s
Dilemma. She posed all the students with an extra credit question that asked students to
choose between either getting two marks or six marks in their mid-term exam. The catch was if
more than 8% of the class chose six marks, then no one would be rewarded with any marks.

Thus, each student knew the following:

• If all students say 2 marks, they all get rewarded with equal marks.

• If more than 8% students choose 6 marks, no one would be rewarded with any marks.

There were rules involved too:

1. No student could discuss anything with their peers before answering the question.

2. Everyone had to write his or her answers on a sheet, fold it and turn it in to the instructor.

Clearly in this situation, the collectively optimal outcome for the students was to ask for 2 marks.
However, did that happen?

It all came down to choosing between self-benefit and mutual benefit.

I know it sounds too unreal, but I knew that greed would not get me anything, so rather than
letting go of this chance, I wrote two marks on the sheet and submitted it to my instructor,
hoping in my heart that everyone would do the same.

However, not so surprisingly, the overall score of students who wanted to get six marks was
more than 25%. (And, that one opportunity for me to get an A failed. ‘Cause I got an “–A” at
91% - SAD).

Though, we all learned the concept of prisoner’s dilemma very clearly that day. We were
presented with two options: self-benefit and mutual benefit. Upon making the decision, we
witnessed how this class exercise demonstrated that people often choose to maximize their
personal benefit (which in this case was more marks) and let go of what is best for the class
(everyone getting two marks). It was evidence of the fact that each student reasons in the same
way. This highlights the fact that people are selfish, generally and personal temptations always
come in the way of collective optimal outcome.

Question 4. Are Monopolies beneficial for the society? Give your opinion in 500 words.

No, I believe that monopolies might have some benefits to the society, however, if we look into
the bigger picture it is quite evident that monopolies pose a great threat to an economy. There
are several points to back up my claim. Firs of all, since in a monopoly market structure, there is
only one firm, it has the sole power to provide the good or service. Therefore, it has the power to
offer that specific good or service at a certain price. This causes a great threat to the consumers
because such firms often charge high prices, putting a lot more burden on the consumers.
Similarly, these firms have the power to offer the product or service at a certain quality which
leaves the consumers with no power at their end. Because of no competition in the market,
monopolies often provide low quality goods/services to save their costs of production and make
more profits, causing a loss to the consumers. In addition, as discussed earlier that monopolies
set their own price in the market, they often charge different prices to the customers depending
on how much a certain customer can bear. These firms exploit the customers to every extent
they can.

Furthermore, monopolies have unfair trade practices. They ensure high barriers to new entrants
in the markets so that only then can keep enjoying the benefits by making massive profits. This
causes a threat to the economy as a whole because such practices hinder the growth of an
economy as new businesses are not given a chance. An economy might grow if new
businesses also come into practice as they will add contribution in the GDP of that economy.
Not only that but market structures as monopoly also decreases the chance of employment in
the market because if new businesses would emerge then there are chances that they will
generate employment opportunities in the economy. Such opportunities can help an economy to
eradicate poverty and prosper. Not only in their respective industry, but monopolies also
decrease the employment opportunities in other industries as well. Since there is no need for
product differentiation, firms do not need to invest in advertisement, which causes a great threat
t advertising industry. A huge number of people suffer in terms of unemployment.
Adding to the list of problems, an economy also suffers because of monopolies in terms of
technological advancement. Since there is no competition in the market, monopolies do not find
the reason to spend money on research and development, leaving the economy far behind in
technology.

Keep all these factors in perspective; we can conclude that it would be justify to say that
monopolies are not good for the society.