g202 quiz 2

government property rights

Property decisions made by a small group of elected political representatives

what percent of revenue do artists make from producing music?

10%

economic impact for host countries

-Chiquita's Major Production Hubs: Panama, Honduras -Capital investment inflows: Job creation, medical care, education etc.; Communication and transportation infrastructure for a highly perishable commodity -Political Instability: The Banana Wars between the Banana Republics

the framework agreement

-Countries signing the Framework Agreement with the EU: Costa Rica, Columbia, Nicaragua, Venezuela -These four countries collectively received preferential treatment of an expanded quota of bananas relative to other Latin American countries in exchange for helping to block action stemming from the GATT ruling

the sharing economy

-Defined as "an economic system in which assets or services are shared between private individuals, either for free or for a fee, typically by means of the internet." -The sharing economy can muddle the traditional notion of intellectual property ownership

digital distributors

-Digital downloads (Apple i-Tunes) -Streaming (Spotify) -Piracy (Napster, Limewire, etc.)

Apple's value proposition with i-Tunes

-First Mover (No—MP3.com, Emusic, PressPlay, MusicNet were all there before) -Innovative Business Model (No—Apple copied Emusic's business model and platform) -Special Backing from Labels (No—Record labels gave the same music library to everyone who would pay royalties) -Good Branding/Marketing (Yes—Most see Apple as an innovator brand that leads the industry) -Closed Eco-System (YES!—As soon as you buy an i-Device, you are one click away from i-Tunes; Apple took all the demand for convenience and embedded it into a device)

tariffs vs quotas

- One difference is that tariffs raise revenue while quotas do not; However, if quotas are combined with a licensing system, they can raise revenue through licensing fees - Also, quotas can result in more inefficiency; If the license fee does not take away the price premium (PQ—PW) in the domestic market, then foreign producers will have an incentive to lobby to get into the domestic market (to sell at the higher price); Resources spent on lobbying will lead to the increased inefficiency

standard criminal decision rule

-Becker model's criminal decisions based on rational optimization around the risk and reward of committing crime; Specifically, criminal decisions are based on comparing expected utility to current utility -Criminals will: -Commit crime if expected utility from committing the crime is greater than the current utility; EU>U -Not commit crime if expected utility from committing the crime is less than the current utility; EU<U -Note that if expected utility from committing the crime is equal to the current utility, the model breaks down because individual risk preferences will decide the action; If EU=U the model can't predict individual's action

distributors before digital

-Brick & Mortar (Virgin Records) -Online Retail (Amazon) -Radio & Synchronization (movies & ads)

pros of digital

-Cheaper than buying an album -Convenient (Easy to customize (unbundle); Easy to purchase; Easy to transport; Easy to use; Easy to store; Easy to share)

Spotify's value proposition

-Freemium versus Premium business model is not unique -Learning of tastes and preferences was copied from Pandora—not unique -Interface is cool, but not defendable (reverse engineering from competitors) -Music library is the same as others—commodity, no differentiation -Commodity offering that only gets 20% of the revenue; It will be challenging to earn profits in the highly saturated distribution space -In commodity markets, sometimes you can create a winner-take-all market

tariffs result in:

-Higher Domestic prices -Under-consumption in the domestic market -Over-production by domestic producers -Less imports to the domestic market. -Domestic government revenue: (tariff)*(IMPt)

EU common banana trade policy

-Import trade restrictions used in the common policy: Tariffs, Quotas with some licensing fees -EU classification of the three banana growing regions: Traditional ACP (former colonies of Britain & France): Free access, ACP: Some trade restrictions, Latin America: Most restrictive quotas and highest tariffs -Goals: Incentivize capital investment for development in former colonies, Special interest to protect domestic companies (Geest and Fyffes)

do trade restrictions save jobs?

-Imports and Exports are linked through income creation; Restrict Imports, and exports will also fall; Jobs will be lost in the exporting industries -Import restrictions raise prices on inputs; Jobs will be lost in industries that rely on cheap imported materials -Jobs increase in the domestic industry that has trade restrictions; But, this has more workers working in inefficient industries

did record labels initially embrace digital?

-Labels originally fought against MP3 files by suing PMP300 (device manufacturer) -Once they realized consumer preferences shifted to digital, the labels launched their own streaming pay sites (example: PressPlay and MusicNet) -Following the failure of their pay sites, record labels began sharing their music libraries with other digital distributors

quotas result in:

-Less imports to the domestic market -Under-consumption in the domestic market -Over-production by domestic producers -Higher Domestic prices -Potential for government revenue: (fee)*(IMPq) -Potential for foreign gain: [(Pq-Pw)-Fee]*IMPq

Limitations of PressPlay and MusicNet:

-Limited artist selection -Limited playability (restricted downloads, music expiration, limited device compatibility) -Digital Rights Management (DRM) protection -You have to pay for all the constraints while Napster was free

actions against EU common policy

-Lobbying with Bob Dole (Unwanted public attention on Bob Dole's motive to represent Chiquita put an end to this partnership with no positive resolution for Chiquita) -USTR Section 301 Petition (Filed by Chiquita, the petition was successfully accepted by the USTR, but ultimately produced no sanctions against the unfair trade practices of the EU) -GATT Complaint (Filed by the Latin American countries against EU import policy; GATT resolution panel ruled against the EU policy, but action stemming from the ruling was blocked by the EU members—but they needed help)

why do nations adopt trade restrictions?

-National Defense Reasons; The good is essential for national defense -Retaliation against dumping; Dumping: sale of goods at prices lower than production costs in foreign markets -Infant Industry Argument; New domestic industries need to be protected while immature -Special Interests Influences; Businesses try to gain market power over competitors; Businesses try to save jobs and stop creative destruction

cons of digital

-No physical product (no art cover) -Quality concerns -No ability to resell -Need data plan to support -Buy a device

Spotify for podcasters

-Podcasters negotiate directly with Spotify -Predicts that 20% of listening in the near future will be non-music content

Spotify case update - disruption and power shift

-Record labels control most revenue, while they rely on distributors to innovate and adapt; Next step is to disrupt the stronghold that the labels have on copyrights -Can distributors such as Spotify lead their own disruptions? (Lowered production costs would make it easier to replicate what the labels offer; However, it is hard to crack contracts between music labels and artists, as well as hard to legally crack copyright laws)

variables of interest

-The size of the punishment (F); Strategic Variable for government -The probability of being caught (π);Government can affect this with detection technology; Criminals can affect this with their technology -Payoff of the crime (G); Once a particular crime is chosen the payoff is fixed so this is not considered "strategic" to anyone -Income (Y); Changes in Income do not affect the decision to commit a crime in this simple model

3 causes of trade restriction inefficiency

-Under-consumption -Over-production -Lobbying

online file sharing

-Variable of Interest: Probability of being caught -Can the government significantly affect this with hundreds of millions of global users? -NO...global enforcement is the problem: -Copyright protection stops at a country's borders, unless other countries grant reciprocal protections -Targeting individual users comes with very high enforcement costs -So, for the average user, the probability of getting caught is pretty close to zero

the global banana market

-banana growing regions: Latin America, Africa, Caribbean, Pacific Rim -producing companies: Chiquita, Dole, Del Monte, Naboa, Geest, Fyffes -major consumers: EU, North America, Asia

secure private property rights give property owners incentive to:

-create more value with property (benefit others) -maintain property and conserve more for the future -innovate more and create new technologies -engage in more voluntary exchange

winners and losers of EU common policy

-winners: Former EU Colonies (Incentivized capital inflow), EU Banana Companies (Geest and Fyffes were mostly invested in traditional ACP), EU Governments (Tariff revenue and license fee revenue) -losers: Latin American Countries (De-incentivized capital investment), Foreign Banana Companies (Chiquita, Dole, Del Monte and Naboa were mostly invested in Latin America; Surplus of a perishable good), EU Consumers (Germans) (Higher prices, banana shortage) -With active special interests on both sides of the trade policy, this political issue will come down to relative strength

USA producing companies:

Chiquita, Dole, Del Monte

In thinking about how Spotify could achieve market dominance in streaming services, which of the following characteristics is not one that would enable Spotify to lead a winner-takes-all market? A.High switching costs B.First-mover brand reputation C.Significant network effects D.High barriers to entry

answer: B

Imports enhance the welfare of the domestic country because:

Consumer surplus increases more than producer surplus decreases

what percent of revenue do distributors make from producing music?

20%

what percent of revenue do record labels make from producing music?

70%

what is a quota?

A quota is a maximum quantity placed on imports; The quota indirectly affects the domestic price by creating a situation of excess demand

what is a tariff?

A tariff is a tax placed on imports; The tariff directly affects the domestic price charged on imports

banana growing regions: ACP

Africa, Caribbean, Pacific Rim

Consumption Rule (QD):

Domestic consumers should consume as long as value (DUS) is greater than or equal to production cost (PW)

Production Rule (QS):

Domestic producers should produce as long as their production costs (SUS) are less than or equal to the world's cost (PW)

Spotify for artists

Enables independent artists to upload their music to Spotify—where the artist and Spotify share the revenue without a cut taken from a record label

Exports enhance the welfare of the domestic country because:

Producer surplus increases more than consumer surplus decreases

EU producing companies:

Geest, Fyffes

winner take all markets

If Spotify can achieve one of these features in its business model, it can potentially win the market: -High-Switching Costs (Many users have multiple music providers in their digital platform (easy switching)) -Barriers to Entry (Spotify itself is a new entrant into a market that does not have barriers) -Network Effect (If all my friends and family are with one network, I have to go to that one network) -Spotify is always trying to grow its network

risk-averse criminal decision rule

If the decision rule is change to include risk aversion, the criminal will only commit the crime if the expected utility achieves a desired gain over current utility

quota inefficiency: lobbying:

If there are foreign gains, some percent of F will become lobbying inefficiency

how to gauge the size of lobbying?

Level of Foreign Gains —less foreign gains causes less inefficiency

how to gauge the size of over-production?

Level of Imports —more imports causes less inefficiency

how to gauge the size of under-consumption?

Level of Imports —more imports causes less inefficiency

issue definition

Make file-sharing without copyright royalties paid (piracy) an illegal activity

Ecuador producing companies:

Naboa

concentrated costs

Napster, Limewire, and other file-sharing sites lose their ability to earn profits; Ignore general users in the classification, as they won't actively lobby

communal property rights

No single owner, everyone has access while it lasts; Over-utilization occurs, and no one has incentive to conserve for the future

copyright

Right to exclude all others from reproducing, distributing, or performing a work Examples: writings, software, music, art, movies, t.v. programs

patent

Right to exclude all others from using, producing, or selling an invention Examples: pharmaceutical drugs, manufacturing equipment, home appliances

concentrated benefits

The incumbent record labels to protect their returns from holding music copyrights

implication for lobbying

The outcome will depend on relative strength; Record labels had all the relative strength, with copyrights on their side; The problem with music piracy is that global enforcement is very difficult; So, piracy continues to be a threat to industry revenues.

quota inefficiency: under-consumption (G):

There are too few units consumed domestically, causing society to miss out on a net benefit

tariff inefficiency: under-consumption (G):

There are too few units consumed domestically, causing society to miss out on a net benefit

quota inefficiency: over-production (E):

There are too many units produced domestically, causing society to incur a net cost

tariff inefficiency: over-production (E):

There are too many units produced domestically, causing society to incur a net cost

trademark

a word, name, symbol, or device that is used in trade with goods to indicate their source; Used to distinguish goods from competitors

For a given product, imported into the US at a price of $20, which of the following quotas enacted in the US will potentially cause the least amount of lobbying inefficiency? A.A 100 unit quota with a license fee of $30 per unit that increases the product's price in the US market to $60; FG=[(60-20)-30]*100=1000 B.200 unit quota with a license fee of $15 per unit that increases the product's price in the US market to $50; FG=[(50-20)-15]*200=3000 C.300 unit quota with a license fee of $15 per unit that increases the product's price in the US market to $40; FG=[(40-20)-15]*300=1500 D.400 unit quota with no license fee that increases the product's price in the US market to $30; FG=[(30-20)-0]*400=4000

answer: A

For a given product, which of the following trade restrictions would likely result in the least overall inefficiency? A.A $30 tariff that resulted in 4,000 units of imports B.A quota of 2,000 units that has a licensing fee set equal to the difference between the world price and the domestic price after the quota takes effect C.A $50 tariff that resulted in 1,000 units of imports D.A quota of 4,000 units that has a licensing fee set lower than the difference between the world price and the domestic price after the quota takes effect.

answer: A

For a given product, which of the following trade restrictions would likely result in the least overall inefficiency? a) A $20 tariff that resulted in 5,000 units of imports b) A quota of 3,000 units that has a licensing fee set at the difference between the world price and the domestic price after the quota takes effect c) A $30 tariff that resulted in 3,000 units of imports d) A quota of 5,000 units that does not have a licensing fee

answer: A

If a country does not have a comparative advantage in producing a good and opens up to free trade of the good, the welfare in the domestic market increases because: a) consumer surplus increases more than producer surplus decreases b) producer surplus increases more than consumer surplus decreases c) both consumer and producer surplus increase d) Welfare in the domestic market does not increase because of the lack of comparative advantage

answer: A

If the world price of steel is $20, compare the pricing impact of the US enacting a $10 tariff per unit of steel imported versus the US imposing an import quota of 150 units of steel with a $10 per unit licensing fee. a) The after tariff price would be Pt = $30, while the after quota price would be Pq = $40 b) The after tariff price would be Pt = $30, while the after quota price would be Pq = $30 c) The after tariff price would be Pt = $40, while the after quota price would be Pq = $30 d) The after tariff price would be Pt = $40, while the after quota price would be Pq = $60

answer: A

Which of the following products is most likely to have patent protection? a) Lipitor (pharmaceutical drug for lowering cholesterol sold by Pfizer) b) Office 365 (web-based software launched by Microsoft) c) The Lion King (animated movie produced by Disney) d) Party Rock Anthem (music single performed by LMFAO)

answer: A

Consider an individual with a current income of $60,000 that is considering committing a crime that has a financial gain of $30,000 and a fine of $30,000 if the individual is caught. Based on the standard Becker criminal decision rule, which of the probabilities of getting caught listed below is the lowest probability that would make certain that the individual does not have incentive to commit the crime? A.3/4 (or 75%) B.2/3 (or 66.67%) C.1/2 (or 50%) D.1/3 (or 33.33%)

answer: B

Crime 1: Payoff=$50,000, Probability of getting caught=3/5, Punishment=$20,000 fine Crime 2: Payoff=$20000, probability of getting caught=1/4, Punishment=$20,000 fine Above are some characteristics of potential corporate crimes that an individual with a current income level of $60,000 is considering committing. If the individual can only commit one of the above crimes due to time and resource constraints, which one will the individual rationally commit using the decision rule to only commit crime if utility is expected to increase by at least 10% after committing the crime? a) Crime 1 b) Crime 2 c) Either Crime 1 or Crime 2 as they both have expected utility 10% greater than current utility d) Neither Crime 1 nor Crime 2 as they both do not have expected utility 10% greater than current utility

answer: B

In regards to the Chiquita International case, which of the following is an incorrect statement about the common EU policy on banana imports? A.The common policy established preferential banana trading rules for former colonies of the EU countries B.The common policy created a surplus of bananas and decreased banana prices in the European market C.Germany, one of the EU members, was against the formation of the EU's common policy D.The common policy weakened the position of the Chiquita company in the European market

answer: B

Which one of the following is not one of the benefits of well defined and enforced private property rights? a) Voluntary exchanges between property owners will occur more frequently b) Owners will devote less resources to developing new technology c) Owners will have more incentive to use their property to benefit others d) Owners will have more incentive to maintain the resources that they own

answer: B

Assume that sugar is initially traded freely in the US at the world price of $20 and at this world price the US imports 5,000 units of sugar. Then assume that the US enacts a quota of 2,000 units of imported sugar that raises the domestic price of sugar to $45. What is the most amount of revenue that the government can generate if it combines this quota with a licensing fee? a) $10,000 b) $45,000 c) $50,000 d) $90,000

answer: C

Consider an individual with a current income of $40,000 that is considering committing a crime that has a payoff of $20,000 and a fine of $20,000 if the individual is caught. Based on the standard Becker criminal decision rule, which of the probabilities of getting caught listed below is the highest probability that would still give the individual incentive to commit the crime? a) 2/3 (or 66.67%) b) 1/2 (or 50%) c) 1/3 (or 33.33%) d) 1/4 (or 25%)

answer: C

For a given product that the US imports from the world market at a price of $40, which of the following quotas enacted in the US market has the potential to cause the least amount of lobbying inefficiency? a) A 1,000 unit quota with a license fee of $20 per unit that increases the product's price in the US market to $80 b) A 2,000 unit quota with a license fee of $5 per unit that increases the product's price in the US market to $70 c) A 3,000 unit quota with a license fee of $20 per unit that increases the product's price in the US market to $60 d) A 4,000 unit quota with no license fee that increases the product's price in the US market to $50

answer: C

In regards to the Chiquita case, the EU government used what form(s) of trade restrictions? A.Tariffs only B.Quotas only C.A combination of tariffs and quotas D.Neither tariffs or quotas, as the EU government simply issued banana import licenses

answer: C

Within the Becker model of crime, which of the following variables does government completely control? a) The payoff of the crime b) Income levels c) The size of the punishment d) The probability of getting caught

answer: C

Based on the Spotify case, how were music piracy sites (like Napster, Gnutella, and Torrent) able to provide a framework for music swapping? A.the ownership rights of produced music had never been defined by government laws and regulations B.communal property rights are given to produced music, so everyone has the right to use the songs that are produced C.the typical patent protection given to produced music does not apply to internet consumers of music D.there was no enforcement within the internet of the copyright laws that protect music producers

answer: D

three types of property rights:

communal property rights, government property rights, secure private property rights

Exports: When the world price is above the domestic price, the domestic industry has the:

comparative advantage; The domestic industry exports to the world

Imports: When the world price is below the domestic price, foreign producers have the:

comparative advantage; The domestic industry imports from the world

Current Utility

current utility=Y0 (annual income)

expected utility

expect utility=(1-π)(Y0+G)+(π)(Y0-F)

foreign gains

foreign gains=[(PQ-PW)-Fee]*IMPQ

intellectual property (IP) rights

patent, trademark, copyright

over-production occurs under which trade restriction(s)?

quota and tariff

under-consumption occurs under which trade restriction(s)?

quota and tariff

lobbying occurs under which trade restriction(s)?

quota only