G202 Assessment 2
the global banana market
Banana growing regions: -latin america -ACP: africa, caribbean, pacific rim Producing companies: -USA: chiquita (leader), dole, del monte -Ecuador: noboa -EU: Geest (netherlands), Fyffes (ireland) Major consumers: -EU: germany is a huge one, HUGE -North america: big -Asia: rich nations
economic impact for host countries
Chiquita's major production hubs: -panama (latin america) -honduras Capital investment inflows: they brought in a lot of capital to grow bananas. Allowed these countries to grow and build infrastructure. Chiquita did a lot for their economies. Roads, railways, habors -job creation, medical care, education, etc. -communication and transportation infrastructure for ahighly perishable commodity -makes a lot of misallocation of capital and corruption and instability of $ Political instability: the banana wars between the banana republics -
mechanics of productive regulations
Productive regulations imposed on sellers: cause an inward shift of the supply curve (decreased supply) by forcing the seller to incur compliance costs. -Current avg price: $15.00 per ride. what if productive regulation adds $3 in compliance cost per ride? -increase the price to the buyer, but it is not optimal to pass all the compliance costs on to the buyer. Pbuyer: $17.00 (consumer surplus decreases) -Sellers take home price, after compliance cost, is decreased: Pseller: $17.00 - $3.00 = $14.00 (producer surplus decreases) because the buyer's price increased, less will be consumed, so the market shrinks
Mechanics of productive regulations
Productive regulations imposed on sellers: cause an inward shift of the supply curve (decreased supply) by forcing the seller to incur compliance costs. Tell businesses how to produce and run the business. -Current price = $3.00 per coffee gloves, sanitize, masks what if required PPE adds 10 cents per coffee served? see it as a tax -increase the price to the buyer, but it is not optimal to pass all the compliance costs on to the buyer Pbuyer = $3.06 -Sellers take home price, after compliance cost, is decreased Pseller = $3.06 - $.10 = $2.96 because the buyer's price increased, less will be consumed, so the market shrinks. Gov doesn't collect rev. The suppliers of masks do
consumer perception of digital
Pros of digital: +cheaper than buying an album +convenient: easy to customize (unbundle), purchase, transport, use, store, and share (threat to the record labels) Cons of Digital: -no physical product (no art cover) -quality concerns -no ability to resell -need data plan to support -buy a device (opportunity seized by Apple)
rules of efficiency under international trade
Qd - Qs = imports
continued
Revenue -Explicit costs (accounting costs) -implicit costs (opportunity costs) = + 0 - -positive economic profits signals that you are earning more than the normal rate of return (above average), and you are beating your opportunity costs -zero economic profit signals you are earning exactly the normal rate of return (average), and you are breaking even with you opportunity costs. nothing better you could've done. firms are satisfied -negative economic profit signals you are earning less than the normal rate of return (below average), and you are not covering your opportunity costs. shut down consideration
Firm objective: max economic profits
Revenue: price times the quantity sold Costs: explicit costs plus implicit costs -explicit costs: when a monetary payment is made. Ex) wages paid to labor -implicit costs: involve the firm's resources, but do not have a monetary payment. Ex) consultant-->human capital(time). opportunity cost of the owner's investment Economic profit: revenues minus all costs -implicit costs are calculated as a normal rate of return -normal rate of return: what firms could get, on average, by investing in businesses with similar risk -what else could have been done?
when to export
World market: all world producers and consumers Domestic: only US Then we compare. When we compare, we see who has relative strength in production When the world price is above the domestic price, the domestic industry has the comparative advantage -the domestic industry exports to the world -domestic can produce at a lower opportunity cost -strength in production Exports enhance the welfare of the domestic country because producer surplus increases more than consumer surplus decreases -world price becomes domestic price
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
a $30 tariff that resulted in 3,000 units of imports
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? There are two constraints: 1. lowest pi 2. EU<U a. 3/4 (75%) b. 2/3 (66.67%) c. 1/2 (50%) d. 1/3 (33.33%)
To start, set EU=U 60,000 = (1-pi)(60,000+30,000)+pi(60,000-30,000) -30,000=-60,000pi pi=1/2 (50%) makes EU=U So, to get EU<U, we need pi>1/2 (criminals don't like high pi) From the responses, both 2/3 and 3/4 are greater than 1/2. So now you want to pick the lowest pi that is greater than 1/2. So the answer is B. *never choose 1/2* piracy is very hard to catch. they crunch these numbers and have no incentive to stop. everything digital is less protected. CHANGE: highest probability that criminal has incentive to commit crime? anything < 1/2. wouldn't have to redo math. EU bigger than CU
impact of trade restrictions
A quota is a maximum quantity (physical limitation put on quantity) placed on imports -the quota indirectly affects the domestic price by creating a situation of excess demand -domestic producers raise prices -consumers want more than they're getting, but foreign producers can't meet that demand Quotas result in: -less imports to the domestic market -under-consumption in the domestic market -over-production by domestic producers -higher domestic prices
example
assume an individual with an annual income of $30,000 (Y0) is considering committing a crime with a payoff of $15,000 (G). the individual has a 1/3 chance of getting caught (pi) and fined $9,000 (F) -Current utility: Y0 -Expected utility: (1-pi)(Y0+G)+(pi)(Y0-F) -Current utility: U=30,000 -Expected utility EU = (1-1/3)(30,000+15,000)+(1/3)(30,000-9,000) EU=(2/3)(45,000)+(1/3)(21,000)=37,000 this criminal will rationally commit the crime because EU>U. incentive to commit crime
Crime 1: Payoff=$50,000 Probability of getting caught=3/5 Punishment=$20,000 fine Crime 2: Payoff=$20,000 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.
b) Crime 2
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 amt 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
c. $50,000
the framework agreement
countries signing the framework agreement with the EU: -Latin America: costa rica, colombia, nicaragua, venezuela: "give u an access to feer EU market than other LA countries if u withdraw the GATT" chiquita is not part of any of these countries-->defeated These 4 countries collectively received preferential treatment of an expanded quota of bananas relative to other LA countries ine xchange for helping to block action stemming from the Gatt ruling
Creative destruction and gov't discretion
creative destruction: when entrepreneurial change makes older industries or technologies become obsolete -less efficient industries die off, and free resources that can go to new more efficient industries Government sometimes chooses to block creative destruction by enacting policies to protect the dying industries -Ex) governments protecting taxi cabs from uber. taxi cab owners supported politicians
case update: manage political risk
in march 2014, chiquita proposed a merger with irish competitor fyffes where the combined market share in banana trade would catapul chiquita-fyffes inf ront of the current banana leader dole -but, chiquita shareholders rejected the fyffes proposal (oct 2014) instead, on oct 28th, 2014, chiqutia agreed to be acquired by cultrale-safra (brazilian orange juice maker) for $742 mil -essentially chiquita's distribution channels to the US, farming, and logistics will be leveraged by cultrale-safra Takeaways: -foreign firms do not have much policial leverage (relative strength) in influencing domestic policy makers -chiquita learned that euro-market dependence xposed its business to euro-political risk. thus, it moved into more us-focused products to gain leverage and lower political risk
government tools and social efficiency
look at slides. Week 8 slide 31-33
quota graphically
look at slides. week 6slide 27
Exports graphically
society is better off increasing the price
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 decrease 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
a. consumer surplus increases more than producer surplus decrease
in regards to the chiquita case, the EU gov used what form(S) of trade restrictions?
a. tariffs only b. quotas only c. a combination d. neither, they simply issued banana import licenses Answer: C
below is a table of information on the US steel industry's price and resulting US consumption (Qd) and US production (Qs). If the world price of steel is $20, compare the pricing impact of the US enacting a $10 tariff per unit of steel imported vs 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
a. the after tariff price would be Pt = $30, while the after quota price would be Pq = $40
which of the following is an incorrect statement ab 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 agianst 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
government tools and social efficiency
taxes, subsidies, and productive regulations can correct existing inefficiency if they push the market closer to Qe. however, government policies can also be the cause of inefficiency if they push the market away from Qe
EU common banana trade policy
the EU is building trade barriers Import trade restrictions used in the common policy: -tariffs -quotas with some licensing fees -restricted access to EU market: bananas grown in Latin America EU classification of the 3 banana growing regions: -traditional ACP (former colonies of britain and france): free access. -ACP: some trade restrictions -latin america: most restrictive quotas and highest tariffs Goals: -incentivize capital investment for development informer colonies -special interest to protect domestic companies (geest and fyffes)
variables of interest
the size of the punishment (F) -strategic variable for government -gov has control over F --> can increase fines and allow gov to gain rev 1) deterrence of fine 2) revenue The probability of being caught (pi) -government can affect this with detection technology (radar) -criminals can affect this with their technology (spray paint camera used) Payoff of the crime (G) -once a particular crime is chosen the payoff is fixed so this is not considered "strategic" to anyone fixed impact on their income Income (Y) -changes in income do not affect the decision to commit a crime in this simple model -in current and expected utility --> can affect in very different ways
music rights and piracy: purchasing music illegally
there are active special interests on both sides of the piracy debate -incumbent record labels want to protect their returns from holding music copyrights -napster (spent 100s of $ on their case to say they were fine. they had a lot to lose), limewire, and other file-sharing sites wanted to build a business model based on the weak enforcement of copyrights in the digital world Record labels have all the relative strength, with copyrights (well-defined) on their side, and courts have ruled against piracy sites within US jurisdiction There is a continued problem with music piracy as global enforcement of copyrights is difficult when the priacy sites are located out of US jurisdiction -industry revenues continue to be threatened by piracy -copyright laws stay within US borders
tariff graphically
1. raised to $55 2. 500 3. 900 4. 400 D>S 5. $12,000 (400 x $30)
Actions against EU common policy
Lobbying with bob dole: used private jet of chiquita-->questionable -unwanted public attention on bob dole's motive to represent chiquita put an end to this partnership with no positive resolution for chiquita -chiquita partners with bob dole-->not successful-->gave negative publicity to bob dole who was running for US senator USTR Section 301 Petition: USTR tried to lobby, but went nowhere, USTR works for the interest of american companies -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: only member countries can file a complain-->chiquita provided the resources to allow them to do this. dumb move by chiquita. only works if all members agree to this. obvi the EU countries wouldn't -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
Apple's value proposition with iTunes: $1 revenue, keep 20 cents. the 20 cents has to cover server costs, programming, storage, interface, labor, capital. Apple was losing money with itunes. stuck with it because they had an in to the market. customers buy ipod and legally buy music through itunes. always increasing storage. demand more storage and a new device. apple said they could raise prices if they remove DRM-->to encourage customers to download way more demand more storage and new apple products
-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 ecosystem: yes-as soon as you buy an iDevice, you are one click away from iTunes. apple took all the demand for convenience and embedded it into a device. negotiated on behalf of pirates. device sales were driven by digital distribution
did record labels initially embrace digial?
-Labels originally fought against MP3 files by suing PMP300 (device manufacturer): interesting data point before mp3 players became popular- as music CD sales went down, blank CD sales went up -Once they realized consumer preferences shifted to digital, the labels launched their own streaming pay sites (example: PressPlay and MusicNet) Limitations of pressplay and musicnet: --limited artist selection while napster was unlimited --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 following the failure of their pay sites, record labels began sharing their music libraries
entrepreneur's role: profit discovery
-Risk takers: entrepreneurs take risk in order to find what ventures are profitable. only 20% succeed -Visionaries: entrepreneurs try to exploit opportunities that exist within markets. opportunity is there. uber links ppl who need a ride and ppl who wanna give a ride -Entrepreneurs drive market growth by: 1. offering new products or opening new markets 2. creating lower cost technologies 3. finding new resources there are trees underwater: bring these up and use for timber industries: vision
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" -take idea of property and share it -create new possibilities -the sharing economy can muddle the traditional notion of intellectual property ownership
Spotify's value proposition
-freemium vs premium business model is not unique -learning of tastes and preferenes 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
for a given product, which of the following trade restrictions would likely result in the least overall inefficiency? biggest imports, smallest inefficiency
-hope 1 has lobbying and 1 doesn't -lobbying doesn't happen under a tariff -underconsumption, lobbying, overproduction 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 --> no foreign gains or lobbying c. a $50 tariff that resulted in 1,000 units of imports --> tariff no lobbying 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 -not all quotas have lobbying, but this one does bc it has foreign gains -lobbying increases inefficiency Answer: A MOST: C-->least imports and and B: the closest one to it does not have lobbying
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 -for example, if we change the decision rule to state "i only commit crime if i expect to get at least a 30% gain in utility" we will see that the individual will not commit the crime -the new threshold for comparison is at least a 30% gain in utility = 1.30 x 30,000 = 39,000 -since the expected utility of committing the crime was EU = 37,000 the criminal will rationally not commit the crime
3 Causes of Trade Restriction Inefficiency
-level of imports: best way to gauge overproduction and underconsumption -the foreign producer is lobbying -US trade authority is like a bouncer -the fee takes away foreign gain and incentive to lobby
tariff graphically
-only a few US producers can produce in this market -rest of world is better at making wine. price lowers. US is now a price taker when market opens up to foreign producers. 1. 200 2. 1200 3. 1200-200= 1000
Case UPDATE: pivot strategy
-the other companies invested in the traditional acp said they would diversify it: saturated the market In the late 1990s, after chiquita's lobbying effots failed, it was in a dangerous position economically -chiquita missed its opportunity to move into the traditional acp region, as its competitiors mvoed first -the US and LA markets were saturated with bananas (driving prices and profits down) -the growing asian market was too far for economical transport from LA, and some studies show that asain consumers prefer the taste of asian grown bananas What should chiquita do to repostition in the early 2000s? -focused on american market -chiquita made strategic acquisitions of prepackaged salad producers and converted several plantations to salad -sell in america-->only subject to american policies -the market for prepackaged salads was growing in the US, and chiquita wanted to diversify into a product that would be supported by its domestic market policy
quota graphically
1. 300 2. 1100 3. 800
impact of trade restrictions
A quota is a maximum quantity placed on imports -where is the quota enforced? at the border -the quota indirectly affects the domestic price by creating a situation of excess demand. quota is a limitation on imports and then raises price -imposed by domestic economy to limit cooperation with international trade Quotas result in: -less imports to the doemstic market -higher domestic prices -potential for government revenue if the gov puts a fee on the quota (Fee)*(IMPq). tariff always generates gov. rev. -potential for foreign gain: [{Pq-Pw)-->premium-Fee-->premium has to be bigger than the fee]*IMPq. quota is a VIP invitation. foreign firm invited by US to come sell. ppl who have the pass could gain
impact of tariffs
A tariff is a tax placed on imports -import: a good sold domestically but produced/manufactured oversees -the tariff directly affects the domestic price charge on imports -feature an economy can use to restrict the purchase of a foreign good Tarrifs result in: -higher domestic prices -less imports to the domestic market: decrease consumption in domestic market -domestic government revenue: (tariff)-->tax x (IMPt)-->quantity after tariff took effect
Impact of tariffs
A tariff is a tax placed on imports -the tariff directly affects the domestic price charged on imports -foreign producer has higher burden for bringing good for selling in US -want to make up for tariff price in sale price Tariffs result in: -higher domestic prices: consumers and foreign producers hurt, domestic producers gain -under-consumption in the domestic market -over-production by domestic producers -less imports to the domestic market Ford factory in Mexico-->shipped to US-->have to pay tariff tax back to US
Gary becker's model of crime
Becker model's criminal decisions based on ration optimization around the risk and reward of committing crime. Specifically, criminal decisions are based on comparing expected utility to current utility. -why do these crimes get done more? and why others less? -in Florida, there is enough money made in traffic violations to pay for entire town Current Utility = Y0 Expected Utility = (1-pi)(Y0+G)+(pi)(Y0-F) (1-pi): probability of success Y0: current income/utility G: gain from the crime/financial reward pi: probability of getting caught: no one perfectly controls it. increase probability: gov increase labor and technology. decrease probability: criminals are alerted when cops are nearby F: government imposed fine/punishment: trying to make money (revenue) and deter the crime. Ex) steven ran a red light: $250 fine. fine is not THAT big, so steven continues to run them and the gov continues to make money Y0&G: can't change income. no way to increase value of crime while committing it.
3 types of property
Communal Property Rights -tragedy of the commons: encourages ppl to use it before someone else does -no single owner, everyone has access while it lasts -over utilization occurs, and no one has incentive to conserve for the future Government Property Rights -Property decisions made by a small group of elected political representatives -captive of self interests -gov is relatively small -has it's own issues Secure Private Property Rights give property owners incentive to -create more value with property (benefit others) ppl wanna buy your property -maintain property and conserve more for the future (allow owner more income) -innovate more and create new technologies -engage in more voluntary exchange (something you value to make more money) -property owners come together to mutually benefit
risk averse criminal decision rule: an individual with a current income of $40,000 (Y0) is considering committing the below corporate crimes. 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%?
Crime 1: G: $20,000 pi: 1/2 F: $10,000 Crime 2: G: $20,000 pi: 2/3 F: $17,500 EU1: (1-1/2)(40,000+20,000)+(1/2)(40,000-10,000)=$45,000 EU2: (1-2/3)(40,000+20,000)+(2/3)(40,000-17,500)=$35,000 Crime 1 only one bigger than threshold New threshold: (1.1) x 40,000 = $44,000 < crime 1 Since EU1>44,000>EU2, the individual commits crime 1
SCDR example: An individual with a current income of $40,000(Y0)current utility is considering committing the below corporate crimes. 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 standard decision rule?
Crime 1: G: $20,000 pi: 1/2 F: $10,000 Crime 2: G: $20,000 pi: 2/3 F: $17,500 EU1: (1-1/2)(40,000+20,000)+(1/2)(40,000-10,000)=$45,000 -->EU>CU so commit EU2: (1-2/3)(40,000+20,000)+(2/3)(40,000-17,500)=$35,000 -->EU<CU so do not commit Since EU1>EU2, the individual commits crime 1 If neither EU is greater than CU then don't commit either
general results of a subsidy
Decreased prices to buyers -consumer surplus increases Increased prices to sellers -producer surplus increases Increased quantity bought and sold -subsidies are efficiency enhancing in markets that are under-producing relative to Qe
Entrepreneurs (risk lover and visionary), Economic Profits, and Creative Destruction
Entrepreneurs outside the firm, and intrepreneurs (doesn't love risks: risks are shared within firm. the firm also have a lot of resources they can use) inside the firm, are trying to drive change and find profitable ventures. Profits are a signal that innovation has paid off: economic profits: R-explicit&implicit costs -positive economic profit: earning more than the normal rate of return and beating your opportunity cost (implicit costs) R-EC>IC -zero economic profit: earning exactly the normal rate of return and breaking even with your opportunity cost. R-EC=IC -negative economic profit: earning less than the normal rate of return and not covering your opportunity cost. R-EC<IC When innovation creatively destroys old innefficient technology, the dying industry may ask (lobby) government for protection. Ex) uber destroying incumbent taxi services accounting profit only includes explicit costs. economic profits includes implicit and explicitcosts
OFS continued
Focus on punishment ($750 to $150,000 per song) RIAA mission: make examples of the few that go to trial in order to deter others -minnesota resident: jasmine thomas-rasset: --2007: 1st jury trial: $220,000 for 24 songs --> most popular songs even though she had more --2009: 2nd jury trial: $1.92 million, judge-reduced to $54,000 --2010: 3rd jury trial: $1.5 million, judge-reduced to $54,000 --> cus she was a single-mother --2012: appeals court reinstated the original $220,000. the obama admin has publically supported the ruling with a brief sent to the supreme court -Boston univ student: Joel Tenenbaum: --2009: 1st jury trial: $675,000 for 30 songs, judge-reduced to $67,500, later over turned and $675,000 reinstated --2011, 2012, and 2013 appeals denied: $675,000 upheld
quota graphically
G - under-consumption: there are too few units consumed domestically, causing society to miss out on a net benefit E - over-production: there are too many units produced domestically, causing society to incur a net cost Lobbying: if there are foreign gains, some percent of F will become lobbying inefficiency. Tariff never gives gains Foreign Gains = [(Pq - Pw) - Fee] x IMPq
$20 tariff graphically
G - under-consumption: there are too few units consumer domestically, causing society to miss out on a net benefit E - over-production: there are too many units produced domestically, causing society to incur a net cost
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: don't have this in hand. Many users have multiple music providers in their digital platform (easy switching) -Barriers to entry: do not exist-->anyone can come in. Spotify itself is a new entrant into a market that does not have barriers -Network effect: (not saying they have this) If all my friends and family are with one network, I have to go to that one network. Why does not one have a MySpace page? because no one has a myspace page... 2 commodities fight with each other continuously until one is forced to drop out of market. Ex) facebook and myspace -Spotify is always trying to grow its network with historical partnerships: facebook, tinder, hulu, starbucks, xbox, etc. (everyone feels surrounded by spotify)
government tools and social efficiency: activists and gov are social regulators. gov is self-interested
Imagine that the NYC taxi cab market is currently under-providing rides relative to the sociallly efficient amt. If the nyc council eneacts a productive regulation that makes it harder and more costly to obtain a taxi cab license, what will be the impact on social efficiency? gov increases burden on sellers. they want to make prices higher to maximize profit To answer, you need to think ab the following: -where is the market relative to Qe before the gov policy? underproduction -where will the market move to after the gov policy? -did the market get closer, or farther away from Qe? more costly to produce-->shrink market
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 -steel tariff-->automotive industry lays off workers Jobs increase in the domestic industry that has trade restrictions -but, this has more workers working in inefficient industries -saves some at the expense of others
general results of a tax: gov revenue is collected
Increased prices to buyers -consumer surplus decreases -pay more to consume less Decreased prices to sellers -producer surplus decreases -sell less and lower price Reduced quantity bought and sold -Taxes are efficiency enhancing in markets that are over-producing relative to Qe -taxes hurt both and market shrinks
continued...
Intrepreneur: an entrepreneurial individual that is employed by a firm Firms employ intrepreneurs to: -stay/jump ahead of rival innovation -improve overall efficiency and technology -keep the brightest minds within the corporation: hire visionary -incorporate more profitable projects Intrepreneurs work for firms to: -enhance financial risk-sharing -improve job security and smooth income -increase access to capital investment Steven's uncle made drugs with pharm company: get many benefits through them
if trade restrictions cause inefficiency, why do nations adopt trade restrictions?
National defense reasons -the good is essential for national defense -need to be readily available -Ex) steel-->guns, helicopters -France goods army Retaliation against dumping -remove volume of inventory -dumping: sale of goods at prices lower than production costs in foreign markets -Canada dumps tires in US made a tariff on syrup Infant Industry Argument -new domestic industries need to be protected while immature -shelter new industry from the rest of the world Special Interests Influences -businesses try to gain market power over competitors -businesses try to save jobs and stop creative destruction -domestic shelter from foreign companies
Tariff vs. Quotas
One difference is that tariffs raise revenue while quotas do not -however, if quotas are combines with a licensing system, they can raise revenue through licensing fees -US doesn't actually collect revenue with quotas, but they could impose a licensing fee Also, quotas CAN result in more inefficiency -quota makes US a VIP club -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
General results of a productive regulation
Similar to a tax, but government doesn't collect the revenue - Revenue is collected within the supply chain - Increased prices to buyers (consumer surplus decreases) - Decreased prices to sellers (producer surplus decreases) - Reduced quantity bought and sold (productive regulations are efficiency enhancing in markets that are over-producing relative to Qe)
Spotify Case Update-Disruption and power shift
Spotify tries to destroy record labels altogether. Wanna go from Artist right to distributors. Spotify is a distributor -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. -Ex of artist led disruptions: 1. Radiohead's "Pay what you want" for In Rainbows album (took out the label). From $9.99 spent on a radiohead album bought in itunes, radiohead would get $1.40. Based on downlaods and donations, radiohead earned $2.26 per album, generating roughly $1 mil more in earnings for the band 2. Wu Tang Clan's auctioning of one copy of their Once Upon a Time in Shaolin Album. Album sold to Martin Shkreli for $2 mil (artist kept, every other copy was digital) 3. Frank Ocean's direct relation with Apple (20%-->30%) (bypassing Def Jam and Universal). Artist share went from 14% to 70%
mechanics of subsidies
Subsidies given to sellers: cause an outward shift of the supply curve(increased supply)by decreasing production costs Current Price $1,000 per solar panel -what if gov subsidizes $100 per panel? Decrease the price to the buyer, but it is not optimal to pass all the subsidy savings on to the buyer -Pbuyer: $925 Seller's take home price, after getting the subsidy, is increased -Pseller: $925 + $100 = $1025 because the buyer's price decreased, more will be consumed, so the market expands
update continued
Target areas that are not copyright protected. Target New artists 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 -Ex: taylor swift originally chose to stick with her label and removed her music from spotify to devalue the streaming services 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 Spotify for podcasters: -wasn't largely protected -podcasters negotiate directly with spotify -predicts that 20% of listening in the near future will be non-music content
mechanics of taxes
Taxes imposed on sellers: cause an inward shift of the supply curve (decreased supply) by increasing production costs Current price = $1.00 per can -what if gov taxes 10 cents per can? Increase the price to the buyer, but it is not optiomal (bc of elasticity) to pass all the tax costs on to the buyer (perfectly inelastic demand doesn't exist) -Pbuyer: $1.06 Seller's take home price, after paying the tax, is decreased -Pseller: $1.06 - $0.10 = $0.96 because the buyer's price increased, less will be consumed, so the market shrinks
value chain of producing music
The %s represent where the money goes. % of revenue they get to keep Record labels: keep most of the revenue (70%). They own contracts, technical owners of the music, copyrights Distributors (20%): keep 20 cents of $1 Digital Tech Shock: changed completely how we distribute music to the world. Changed nothing with artists. Old school: show up to house party with CDs (book of them) wasn't protected Distributors before digital: -brick and mortar (virgin records) -online retail (amazon) -radio and synchronization (movies and ads) +Digital Distributors: didn't change %s -digital downloads (apple itunes) -streaming (spotify) -piracy (napster, limewire, etc) -made distribution space more competitive -opened up piracy, leakage of revenue, the pie is shrinking (size) -spotify: very challenging to make profitable business
online file sharing
Variable of interest: probability of being caught -can the gov 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 avg user, the probability of getting caught is pretty close to 0
When to import
When the world price is below the domestic price, foreign producers have the comparative advantage -the domestic industry imports from the world -increase discipline -domestic producers shrink and under threats Imports enhance the welfare of the domestic country because consumer surplus increases more than producer surplus decreases -Domestic producers are hurt by opening up borders. Can only sell at a lower price. Price may not cover their costs. Consumers have access to cheaper good flowing from the rest of the world. Consumer surplus outweighs producer surplus
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 in particular): higher prices, banana shortage Interest Group Policy: with active special interests on both sides of the trade policy, this political issue will come down to relative strength
which of the following products is most likely to have patent protections? 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. Part Rock Anthem (music single)
a. Lipitor (pharmaceutical drug for lowering cholesterol sold by Pfizer)
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 amt of lobbying inefficiency? Foreign Gains = [{Pq - Pw} - Fee] x IMPq
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] x 100 = 1000 extra profit if you are foreign producer and get to sell in US b. a 200 unit quota with a license fee of $15 per unit that increases the product's price in the US market to $50 c. a 300 unit quota with a license fee of $15 per unit that increases the product's price in the US market to $40 d. a 400 unit quota with no license fee that increases the product's price in the US market to $30 Answer: A
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 (brands move in and out whenever) c. significant network effects d. high barriers to entry
b. first-mover brand reputation (brands move in and out whenever)
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
b. owners will devote less resources to developing new technology
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 -individual compare expected utility to current utility Criminals will: rationally commit-thought through everything and optimize-->choose wisely -commit crime if expected utility from committing the crime is greater than the current utility. If EU>U commit -not commit crime if expected utility from committing the crime is less than the current utility. If EU<U don't commit Note that if expected utility from committing the crime is equal to the current utility, the model breaks down bc individual risk preferences will decide the action. IF EU = U the model can't predict individual's action. -criminal is indifferent -individual risks are not modeled in this model -HAVE to have EU<U to not happen -are they risk lovers or not
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%)
c) 1/3 (or 33.33%)
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.
c) The size of the punishment.
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
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
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. rly well defined b) communal (copyright) property rights are given to produced music, so everyone has the right to use the songs that are produced. c) the typical patent (copyright) 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.
d) there was no enforcement within the internet of the copyright laws that protect music producers.
Intellectual Property (IP) Rights
protect owener Patent: Right to exclude all others from using, producing, or selling an invention -ex: pharmaceutical drugs, manufacturing equipment, home appliances... Trademark: a word, name, symbol, or device that is used in trade with goods to indicate their source -used to distinguish goods from competitors -outcompete rivals -ex: Tiffani: blue jewelry boxes Copyright: right to exclude all others from reproducing, distributing, or performing a work -ex: writings, software, music art, movies, tv programs... fortnite is copyrighted, ps4 is patented
