Government Protection of Suppliers and Employees

Economics: Edexcel A A Level, topic 6.3.8

Monopsony Employers in the Labour Market

A monopsony employer is where one firm dominates the hiring in the market.

Monopsony power

In a perfectly competitive labour market, a firm will hire where supply is equal to the marginal revenue product (MRP).
A monopsony employer looking to maximise profits will hire labour at the point where the MRP is equal to the marginal cost.
At this point, the wage is lower than under a perfectly competitive labour market.

Marginal and average cost

At each wage, the number of workers willing to work is shown by the average cost curve.
Marginal cost is above average because they have to attract new workers with the prospect of a higher wage, while also paying existing staff more to compensate.

Government intervention

Governments can increase workers' rights and help to protect them from a monopsony employer.
Setting a national minimum wage may stop a monopsony employer from hiring workers at a point where the wage is lower than in a perfectly competitive labour market.
Setting a minimum wage at w _min could increase wages in a monopsony.
However, the minimum wage must be set at the right level, or it may have no impact.

Minimum wage in monopsony

State Provision (or Nationalisation)

The state can provide a number of goods and services for consumers. This is called state provision. Nationalising an industry could be a way to protect suppliers and employers in a market.

State provision

The government either provides state provisions itself (e.g. state education) or provides free goods or services to the public that it's bought from the private sector (e.g. private health services offered free to NHS patients).
The government pays for goods/services through tax revenues. It then offers them to the public for free.
Examples:
The National Health Service (NHS).
Police service.
Secondary school education.

Advantages of state provision

State provision can reduce inequality by redistributing money from the wealthy to the poor. This is something the market doesn't always do.
Without state provision, some services might not exist as they aren't profitable.
E.g. some train routes that aren't profitable do not exist.
Value judgements need to be made about what the state can and can't provide well.

Disadvantages of state provision

Without a drive for profit, there is less incentive to make a service as efficient as possible. The economic incentives for efficiency could be eroded.
There is an opportunity cost of providing one service over another.
With asymmetric information, there is a risk of government failure.

Test yourself on Government Protection of Suppliers and Employees

What is a monopsony employer?
Which of the below is most likely to be a monopsony buyer in the international book market?
Which of the following is an example of state provision?

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