Question

A monopoly is a market in which there are high barriers to entry, which are restrictions that make it difficult for new firms to enter a market. There are two types of barriers to entry: natural barriers and government-created barriers. Sort the following into the appropriate type of entry barrier.

• Taxi companies have market power because it is difficult for new companies to obtain a license to operate.
• ALCOA’s production costs per unit of aluminum continued to fall as the firm expanded.
• Pfizer obtains a patent to sell a new drug that will cure cancer.
• Sam’s Scooters is unable to raise finanancial capital because the company is unknown.
• U.S. Steel owned a significant number of iron ore mines, a key input to produce steel.

Answer 1

Government created barriers to entry in a particular market for the entrants to take permission from the government either in the form of a license, patent or copyright. Sometimes there is government monopoly in which government has given legal sanction to a particular firm to operate in the market. Natural barriers to entry are natural to a form in the markets such as economies of scale ownership over key resource, etc. Taxi companies have market power because it is difficult for new companies to obtain a license to operate. There is a license requirement so there is a Government created barrier. ALCOA's production costs per unit of aluminum continued to fall as the firm expanded. This is economies of scale so it is a natural barrier. Pfizer obtains a patent to sell a new drug that will cure cancer. Patent is a Government created barrier. Sam’s Scooters is unable to raise financial capital because the company is unknown. It is natural barrier. U.S. Steel owned a significant number of iron ore mines, a key input to produce steel. It is also a natural barrier as firm has ownership over key resource