Government and Business
Governments can eliminate market failure due to an imperfectly competitive market by
-changing the market structure, for example by eliminating monopoly protection. -imposing regulations that reduce prices. -having the government own the monopoly.
for market equilibrium to be efficient
-consumption must be efficient -production must be efficient
federal trade commission act
-enforces antitrust laws and disputes -prohibits unfair methods of competition -includes consumer protection + prevention of false advertising
sherman antitrust act
-forbids explicit cartels -it's not bad to be a monopoly as long as it doesn't commit "bad acts"
reducing free riding
-government provides goods -have social pressure -merging firms -privatization (exclusions) -compulsion
Regulation might NOT increase total surplus because
-it may not be possible to gather the information necessary to set prices correctly. -the costs of the regulation might outweigh the benefits. -regulators might get captured by the industry
Clayton act
-prevents price discrimination -prohibits use of tie-ins -prohibits mergers that reduce competition -allows for injured to recover triple the damages + attorney fees
3 approaches to eliminate market failure caused by market power
1. gov can eliminate imperfectly competitive pricing with direct approach: own the monopoly/set low prices 2 gov can change the market structure using antitrust/competition laws 3 gov can regulate the industry to prevent firms from setting high prices
The above figure shows the market for steel ingots. If the market is competitive, then the deadweight loss to society is
C
Consider a housing development built near an existing airport. After the houses are occupied, homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited. Is the airport a negative externality?
No, if the original property values reflect the costs imposed by the airport.
to assess various regulatory responses to market failures, the government uses the concept of
Pareto efficiency and cost benefit analysis
outcome of Pareto principle is ______ _________ once all possible improvements have occurred
Pareto efficient
The argument that society should be in favor of changes that benefit some people without making others worse off is known as
Pareto principle
In the U.S., the ________ and the ________ prohibit firms from explicitly agreeing to take actions that reduce competition.
Sherman Antitrust Act; Federal Trade Commission Act
Negative externalities are created when
a driver drives recklessly on a busy highway.
Which of the following goods has the property of rivalry?
a highway
strategic CSR
actions are intended to increase profit in the long run by creating a firms' positive image.
property right
an exclusive privilege to use an asset
free riding
benefiting from the actions of others without paying
public goods
commodity or service whose consumption by one person does not preclude others from consuming it
social marginal costs
cost of manufacturing one more ton of paper to the paper firms + the additional externality damage to people in the community from producing this last ton of paper
marginal external cost
cost of producing an additional unit of a good or service that falls on by-standers
marginal private cost
cost of producing an additional unit of a good or service that is borne by the producer of that good or service
patents
create monopoly power
exclusive dealing arises when a firm sells its products only to
customers who agree to buy from that firm and not its rivals
predatory pricing
firm charges a price below MC or AC to drive its rivals out of business and then raises its price
club good
good that is non-rival but subject to exclusion
emissions standard
governmental limit on the amount of pollution that may be released
regulation of imperfectly competitive markets
governments often directly control price or other variables to eliminate or reduce market failure arising from market power
altruistic CSR (corporate social responsibility)
help society even though they reduce both the profit and value of firm
market failure can take a number of forms:
imperfect competition, externalities, information asymmetries, provision of public goods, and many more
optimal price cap
imposed price is equal to the competitive price and the deadweight loss is eliminated
true social cost
includes all costs incurred by society-private costs + external costs
intellectual property
intellectual property rights such as patents and copyrights promote innovation in various forms, particularly new products, new processes books and artistic creations
Cartels persist despite laws against them because
international cartels are legal.
resale price maintenance (rpm)
is an agreement between a manufacturer and a distributor on the price at which a product will be resold
If a dominant firm is charged with refusal to deal under antitrust law, it is being charged because
it is refusing to sell a key input to downstream rivals, thereby reducing or destroying competition
price ceiling (price cap)
legally limits the amount that can be charged for a product (below equilibrium)
The above figure shows the market for steel ingots. If the market is competitive, then
more than the socially optimal quantity of 50 units of steel is produced.
In the case of a good that has no exclusion and no rivalry, private markets fail because
of free-ridership.
externalities
one type of market failure resulting form a lack of clearly defined property rights is externalities, which are the costs or benefits that production or consumption activity impose on others through non-market channels
open access, club and public goods
open access, club and public goods are special types of goods that may cause market failure, which governments often address
Suppose a small regional airport is served by one of the major airlines, and a new low-cost airline enters the market. If the major airline cuts its air fares in this market to levels that are below its marginal cost in response to the other firm's entry, then the major airline may be engaging in:
predatory pricing
positive externalities
production or consumption activity that creates an external benefit
negative externalities
production or consumption activity that creates an external cost
regulatory capture
putting industry interest ahead of publics
government can control pollution indirectly through
quantity restrictions or taxes on outputs/inputs
Market failures ________ and generate ________.
reduce economic efficiency; deadweight loss
a regulated firm that invests resources to capture regulators (such as bribes/lavish dinner) engage in
rent seeking
intersection between the social MC and market demand =
socially optimal equilibrium
cost benefit principle
supports policies that increase total surplus, even if some will be harmed. A change is desirable if its benefits exceed the costs
emissions fee
tax on air pollution
effluent charge
tax on discharges into airways or waterways
The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called
the Coase Theorem.
The above figure shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. As long as someone owns the lake and the two parties can negotiate, then
the beach operates and the chemical firm produces one ton of pollution.
The above figure shows the payoff matrix for two firms. A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake. A private beach on the lake must decide whether to operate or not. Increased pollution reduces the number of people who wish to visit the beach. If nobody owns the lake, then
the beach operates and the chemical firm produces two tons of pollution.
market failure and government policy
the failure of some markets to achieve economic efficiency provides an important rationale for government policies
If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then
there will be excess demand
antitrust law and competition policy
when marketers are not perfectly competitive, authorities may use antitrust laws or competition policies to promote competition and reduce market failures
Rent seeking is
where firms expend effort and money to profit from government actions.
