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Russia Gas Export Monopoly

In: Business and Management

Submitted By santiOB
Words 693
Pages 3
Lithuania pleads for US gas exports to counter Russia

Russia has a big dominance in the European market of Natural Gas. Many countries are highly dependant on Russia’s exports of natural gas. Lithuania, in this case, is completely dependant on Russia’s natural gas. Russia has taken advantage of this and has abused of their “monopoly” power. Lithuania has to pay 30% more for natural gas than it`s market price. This article addresses this problem and states that Lithuania is “ beholden to a monopoly supplier”.

This monopoly occurs as one single firm (in this case a nation) dominates the market for which there are no close substitutes. Also there are high barriers of entry and exit, in this situation as the article quotes a US senate; “ a law enacted in Lithuania some 75 years ago “ makes such barriers so high. These high barriers as the graph below will show, allow long run abnormal profits to be made. Adding to this, the high price Lithuania has to pay is due to the fact that monopolies have power to set prices; they are price makers. Such price setting allows them to reduce output and increase price to maximise profits. This allows them to make abnormal profits/ super normal profits.

qm pm qm pm In the monopoly diagram above, we can see that in order to maximise profit, Russia would produce (in this case export) at MR=MC. This, added to the fact that AR > AC, would cause them to have abnormal profits as the shaded area shows. This reflects the situation between Russia and Lithuania. It is a negative situation, not only as it`s unfair for Lithuania, but also as it`s not allocatively efficient as price doesn`t equal MC, an also it isn’t productively efficient as at the point qm where output is being produced at, AC is not at it`s minimum level.

To change this Lithuania’s energy minister has pleaded the US “ to speed up the export of natural gas

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