Econ 3
free rider program
because nobody can be easily excluded from consuming a public good, some people may try to reap the benefits of the good without pay for it
behavioral economics
borrows insights from psychology to help explain some economic decisions questions 1. unbounded rationality and 2. unbounded willpower
competitive trends in the US economy recently
growing world trade has increased competition in the US economy
monopolistic competition in the short run
produces which mr=mc price indicated by downward demand slope profit inbetween atc and price on demand curve loss if atc is above demand slope
the winners curse
the plight of the winning bidder who overestimates an assets true value-pay too much for an item often lose money after winning the bid, paying the price of being overly optimistic applies to all cases of bidding in which the true value is unknown at the outset when competitive bidding is coupled with imperfect information, the winning bidder often ends u an overly optimistic loser
core competency
area of speciality; the product or phase of production a firm supplies with greatest efficiency-relies on division of labor and the law of comparative advantage to focus on what it does best internal production and market purchases are alternative ways of organizing transactions. The choice depends on which is more efficient. Market prices coordinate transactions between firms, whereas managers coordinate activities within firms. The market coordinates resources by meshing the independent plans of separate decision makers, but a firm coordinates resources through the conscious direction of the manager
traditional economic approach
assumes that people pursue their rational self interest and this pursuit promotes the general good so it is a reinforcing and beneficial cycle
one side of the market has better information about the product than does the other side
asymmetric information types of info participant may want but lack: information about a products characteristics and information about actions taken by the other party to the transaction
why have some firms evolved into oligopolies ?
can be traced to some form of barrier to entry, such as economies of scale, legal restrictions, brand names built up by years of advertising, or control over an essential resource
cola war game
coke and Pepsi trying to decide a promotional budget. each can have moderate or big budget. if each chooses big budget, then their costly efforts will cancel out and limit profit to 2 billion per year. if each adopts the moderate, the money saved boosts profit to 3 billion a year. if one adopts the big and the other doesn't, one earns 4 billion and the other 1
the difference between a firms profit maximizing quantity and the quantity that minimizes average cost; firms with ________ could reduce average cost by increasing quantity
excess capacity-production falls short of the quantity that would achieve the lowest average cost each producer could easily serve more customers and in the process lower average cost the marginal value of increased output would exceed its marginal cost so greater output would increase social welfare exists with gas stations, drugstores, restaurants, motels, bookstores, flower shops Ex- nations 19,000 funeral directors could efficiently handle 4 million funerals a year but only 2.4 million people die a year so they operate with about 60% capacity
established a federal body to help enforce antitrust laws. president appoints the five commissioners who are assisted by a staff of economists and lawyers
federal trade commission (FTC) act of 1914
price setting game
market for gasoline in a rural community with only two gas stations, each can charge a low price or high price. if both charge the low price then each earns a profit of 500 per day if both charge the high price they also split at 700 each. if one charges the low and one charges the high, the low price get most of business earning 1000, leaving the high price with 200
the ability of a firm to raise its price without losing all its customers
market power by failing to expand output to the point where marginal benefit equals marginal cost, firms with market power produce less of the good and charge a higher price than would be socially optimal
under certain conditions, the preferences of the median, or middle, voter will dominate the preferences of all other voters
median-voter-model median voter in an electorate often determines public choices. political candidates try to get elected by appealing to the median voter why candidates focus on middle class America
a market in which many producers offer products that are substitutes but are not viewed as identical by consumers this product differentiation allows each supplier some power over the price it can charge-differentiate by physical differences, location, services, and product image barriers to entry are low, enough sellers that they behave competitively and act independently
monopolistic competition like monopoly in the sense that firms in each industry face demand curves that slope downward like perfect competition in the sense that easy entry and exit eliminate economic profit or economic loss in the long run in a metropolitan area- individual restaurant, gas station, drug store, dry cleaner, or convenience store
a situation in which one party, as a result of a contract, has an incentive to shrink responsibilities in a way that harms the other party to the contract
moral hazard behavior changes in a way that increases the likelihood of an unfavorable outcome principal agent problem because it occurs when those on one side of a transaction have an incentive to shrink responsibilities because the other side is unable to observe them those with health insurance could be less likely to take care of health, those with theft insurance might leave their valuables more vulnerable
examines how economic decision making affects areas of the brain
neuroeconomics findings have challenge the traditional view that economic choices boil down to a simple process of utility maximization suggest a more complex interaction among competing objectives
in antitrust laws, business practices deemed illegal regardless of their economic rationale or their consequences
per se illegality under sherman act, all agreements among competing firms to fix prices, restrict output, or otherwise restrain competition are viewed as per se illegal
regulating a natural monopoly
profit maximization is inefficient for social welfare. consumers pay a price that far exceeds the marginal cost of providing the service the marginal value of additional output exceeds its marginal cost, so social welfare would increase if output expanded can increase by forcing to lower the price and expand output
Are public goods or private goods more complicated in terms of what goods should be provided, in that quantities, and who should pay it?
public
non-rival in consumption, once produced are available to all in equal amounts, the good can be supplied to an additional consumer for zero marginal cost, once produced suppliers cannot easily deny it to those who don't pay for it
public goods
a stance adopted by voters when they realize that the cost of understanding and voting on a particular issue exceeds the benefit expected from doing so
rational ignorance
because consumers ignore special interest matters
regulators often favor producer interest introduced under the guise of advancing consumer interests or protecting the public
before ruling on the legality of a business practice a court examines why it was undertaken and what effect it has on competition
rule of reason set in 1911 when the supreme court held that Standard Oil had illegally monopolized the petroleum refining industry
the attempt by the uninformed side of the market to uncover the relevant but hidden characteristics of the informed party
screening initial-check resume for spelling and typographical errors
the attempt by the informed side of the market to communicate information that the other side would find valuable
signaling proxy measure-years of education, college grades, and letters of recommendation. sent by the informed side of the market to the uninformed side and is useful as long as less qualified applicants face more difficulty sending the same signal
tries to improve health and safety, such as by control of unsafe working conditions and dangerous products
social regulation in 1972 congress created the Consumer Product Safety Commission with a mission to keep unsafe products off the market health care reform-2010 health care act was the broadest social legislation since the Great Depression
origins of antitrust policy
tech breakthrough that led to larger plant size in manufacturing and the rise of the railroad from 9000 miles in 1850 to 167,000 miles in 1890 economies of scale and cheaper transport costs extended the geographical size of markets so firms grew larger to serve these markets in 1873 and 1883 economy declined, competing firms would form a trust by transferring their voting stock to a single board of trustees which would vote in the interest of the industry. early trusts (any group that tries to form a monopoly) were formed in sugar, tobacco, and oil industries
if an input is well defined and its quality is easily determined at the time of purchase
that input is more likely to be purchased in the market than produce internally firms whose reputations depend on the operation of a key component are likely to produce the component especially if the quality varies firms that are more vertically integrated are also in a better position to capture the returns from research and development so they do more of it producers sometimes integrate backward so they can offer consumers a guarantee about the quality of the components or ingredients in a product if there are many suppliers of a component a firm is more likely to buy it than make it
the efficient level of the public good is found where
the market demand curve intersects the marginal cost curve-where the sum of the marginal valuations equals the marginal cost
the efficient quantity of a private good occurs where
the market demand curve intersects the market supply curve
implications of Stiglers search model
the more expensive an item is the greater the price dispersion in dollar terms so the greater the marginal benefit from shopping around-car vs toothbrush as earnings increase, so does the opportunity cost of time, resulting in less searching and more price dispersion tech change that reduces the marginal cost of information lowers the marginal cost curve, increasing the optimal amount of information and reducing price dispersion as a result of more readily available price information, consumers have become much more price sensitive
reflects the gov attempts to reduce anticompetitive behavior and promote a market structure that leaders to greater competition
antitrust policy attempts to promote socially desirable market performance
when does the underground economy grow
1. government regulations increase 2. tax rates increase 3. government corruption is more widespread
a federal program that supplements the wages of the working poor
earned-income tax credit
how do oligopolists differentiate their products-same as mono comp
1. physical qualities 2. sales locations 3. services offered with the product 4. the image the product established in the consumers minds
why incomes differ
the number of workers in a household education
positive externalities
vaccines, education
four merger waves
1. 1887 to 1904: US Steel and Standard Oil-horizontal- to span national markets 2. 1916-1929: Copper refiner with copper fabricator-vertical-stock market boom 3. 1948-1969: Litton Industries-conglomerate (merge of firms in different industries)-diversification 4. 1982-present: Banking, telecommunications, health services, insurance-horizontal and vertical-span national and global markets, stock market boom
government challenges any merger in an industry that meets two conditions
1. HHI exceeds 2500 and 2. the merger increases the index by more than 200 points mergers with index less than 1500 are rarely challenged ease of entry into the market, the stability of market shares, and gains in efficiency are considered for indexes between 1500 and 2500 less likely to challenge a merger in an industry where market share fluctuates a lot
categories of goods
1. Private-exclusive and rival -pizza -crowded subway 2. Natural monopolies-exclusive and non-rival -cable tv -uncrowded subway 3. Open Access-nonexclusive and rival -ocean fish -migratory birds 4. Public-nonexclusive and non-rival -National Defense -Mosquito control
categories of legislation based on the distribution of costs and benefits
1. Traditional Public Goods- widespread and widespread -national defense 2.Special Interest-widespread and concentrated -farm subsidies 3. Populist-concentrated and widespread. -tort reform 4. Competing Interest -labor union issues
Intergovernmental Panel on Climate Change, a group sponsored by UN was approved in 2007 by more than 120 nations
1. sharply improving energy efficiency in buildings, vehicles, and machines 2. shifting from fossil fuels to nuclear, wind, solar, and other renewable energy sources 3.preserving forests as absorbers of carbon dioxide or as carbon sinks 4. capping agricultural emissions
combinations of benefits and costs yield four possible categories of distributions
1. widespread benefits and widespread costs 2 concentrated benefits and widespread costs 3. widespread benefits and concentrated costs 4. concentrated costs and concentrated benefits
outlaws attempts to monopolize, or cartelize, markets in which competition is desirable. government regulation aimed at preventing monopoly and fostering competition in markets where competition is desirable
Antitrust policy pursued in the courts by government attorneys and by individual firms that charge other firms with violating antitrust laws
passed to outlaw certain practices not prohibited by the Sherman Act and to stop monopoly before it developed
Clayton Act of 1914 prohibits... price discrimination trying contracts-a seller of one good requires a buyer to purchase other goods as a part of a contract exclusive dealing-agrees not to buy from any other supplier interlocking directorates-a person serves on the boards of directors of two or more competing firms
as long as bargaining costs are low, an efficient solution to the problem of externalities is achieved by assigning property rights to one party or the other, it doesn't matter which
Coase theorem least cost wins when the number of parties involved in the transaction is large, Coase's solution of assigning property rights may not be enough
Environmental Protection
Environmental Protection Agency 1. The Clean Air Act of 1970 2. The Clean Water Act of 1972 3. The Resource Conservation and Recovery act of 1976 4. The Superfund law of 1980-toxic waste dumps 40% to air and water 20% to solid waste
who monitors cases involving unequal pay for equal work and unequal access to promotion
Equal Employment Opportunity Commission civil rigfhts act of 1964
unbounded rationality
Herbert Simon was an early critic of the idea that people have unlimited information processing capabilities introduced "bounded rationality" to describe more realistic conception of human problem solving ability-the notion that there is a limit to the info a firms manager can comprehend and act on humans try to avoid making some decisions even when the consequences of no decision
a measure of market concentration that squares each firms percentage share of the market then sums these squares
Herfindahl-Hirschman index HHI the more firms in an industry and the more equal their size, the smaller the HHI
in the presidential election of 1888, the major parties put antitrust planks in their platforms. This consensus culminated in the ____________, the first national legislation in the world against monopoly
Sherman Antitrust Act of 1890 prohibited trusts, restraint of trade, and monopolization, but the laws vague language allowed room for much anticompetitive activity
tit for tat
a strategy in repeated games when a player in one round of the game mimics the other players behavior in the previous round, an optimal strategy for getting the other player to cooperate
benchmark level of income computed by the federal government to track poverty over time; initially based on three times the cost of a nutritionally adequate diet
US official poverty level 14.5 in 2013
Lorenz curve
a curve showing the percentage of total income received by a given percentage of households when incomes are arrayed from smallest to largest
prisoners dilemma
a game that shows why players have difficulty cooperating even though they would benefit from cooperation two thieves are caught near the crime scene and brought to police where they are questioned in separate rooms. The cops know they did it but can't prove it, so they need a confession. each thief can confess on the other or not snitch. if one confesses, he is granted immunity from prosecution and goes free, while the other gets 10 years. if both don't snitch, each gets a 1 year sentence on a technicality, if both confess each gets 5 years
those on the informed side of the market self select in a way that harms those on the uninformed side of the market
adverse selection Ex: owners of lemons try to sell them to ill informed buyers while owners of good cars either keep them or sell them to friends and relatives
tax avoidance vs evasion
avoidance is legal-buying municipal bonds because they yield interest free of federal income taxes evasion is illegal- either failing to file a tax return or filing a fraudulent return by understating income or overstating deductions 85 percent of taxable income gets reported on tax returns -underground economy of 2.7 trillion in 2015
why do pollution and other negative externalities arise?
because there are no practical, enforceable, private property rights to open access resources
elected officials approve legislation, but the task of implementing that legislation is left to
bureaus-government agencies charged with implementing legislation and financed by appropriations from legislative bodies ` receive less consumer feedback and have less incentive to at on the information available less concerned with satisfying consumer demand or with minimizing costs
how can media inform passive voters?
by uncovering inappropriate links between public officials and private interest or by highlighting public corruption
air pollution
can impair fetal development-lower math and language skills Clean Air Act of 1970 and other amendments congress set national standards for the amount of pollution that could be released into the atmosphere-recognized as economic resource -gave people the right to clean air and gave producers the right to emit certain amounts of specified pollutants many firms responded to pressure by cutting the workforce so some lost jobs smog-most common 40%from auto emissions another 40 from consumer oriented products such as paint thinner, only 15 from manufacturing from 1970 to 1990, average emissions pf lead fell 97 percent, carbon monoxide emissions fell 41 percent, and sulfer dioxide fell 25 air is cleaner outdoors now than indoors
producers political power and strong stake in the regulatory outcome lead them, in effect, to "capture" the regulating agency and prevail on it to serve producer interests
capture theory of regulation George Stigler argued that as a general rule, regulation is acquired by the industry and is designed and operated for its benefit SEC failed to uncover Bernie Madoff because some lawyers didn't want to ruffle feathers because they hoped to land high paying jobs in the securities industry after building contacts and experience in Washington. gov started to deregulate some industries after all of this
inflexible approach that required polluters to adopt particular technologies to reduce emissions by specific amounts
command and control environmental regulations introduce particular technologies to reduce emissions by specific amounts-engineering standards and did not recognize unique circumstances across generating plants
unrestricted access to a renewable resource results in overuse
common pool problem people will fish until the ocean is "fished" out overfishing, overharvesting, overused because atmosphere is an open access good waste is dumped in it
legislation that confers concentrated benefits on one group by imposing concentrated costs on another group
competing-interest legislation labor unions versus employers, steel makers versus steel-using industries, sugar growers vs industries such as soft drink bottlers that buy sugar by the truckload
the accused party of antitrust, without admitting guilt, agrees not to do whatever it was charged with if the government drops the charges
consent decree
because information and the time required to acquire and digest it are scare,
consumers concentrate on private choices rather than public choices. the payoff in making private choices is usually more immediate, more direct, and more substantial
unbounded willpower
critic of traditional approach- even when we know whats best for us, often lack the discipline to follow through-most of us despite our best intentions ended up eating, drinking, or spending too much, and exercising, saving, or studying too little
how does interdependence effect oligopolies
each firm knows that any change in the products quality, price, output, or advertising policy may prompt a reaction from its rivals and each firm may react if another firm alters ay of these features
coordination game
each player chooses the same strategy, cost is minimized and each strategy is a Nash equilibrium because no player can improve in that outcome, given the other players choice
approach that offers each polluter the flexibility to reduce emissions as cost effectively as possible, given its unique cost conditions; the market for pollution rights is an example
economic efficiency approach have an incentive to reduce emissions as much as possible and sell pollution permits
aims to control the price, output, the entry of new firms, and the quality of service in industries in which monopoly appears inevitable or even desirable
economic regulation local electricity transmission or a subway system, land and air transportation have been regulated in the past
exist when its cheaper to produce two or more different items in one firm than to produce them in separate firms
economies of scope Ex- General Electric produces thousands of different products ranging from light bulbs to jet engines. By spreading out outlays for research and development over many different products, GE can reduce those costs per unit with econ of scope, average costs per unit falls as the firm supplies more types of products as the scope increases when there are a ton of different products, firms can spend a lot on research and development
adverse selection in labor makets
efficiency wages- in jobs where hidden characteristics are important, employers might be better off offering higher wages because the higher the wage the more qualified workers will be attracted to the job. encourages hired to perform well and keep their job
resource such as oil or coal does not renew itself and so is available in a finite amount
exhaustible resource
occurs when the relationship between the output rate and the generation of an externality is fixed; the only way to reduce the externality is to reduce the output
fixed production technology
setting price equal to marginal cost
gov can require to produce the level of output that is efficient where the price (which measures marginal benefit to consumers) equals the marginal cost of the good results in an economic loss for the monopolist and in the long run would go out of business
subsidizing the natural monopolist
government covers the loss so it earns a normal profit. Bus and subway fares are typically set below the average cost of providing the service with the difference made up by government subsidies DC subway-gov pays for more than 40 percent Amtrak-federal subsidy covering about a third of its operating budget problem is the gov must raise taxes or forego spending somewhere else to pay for the subsidy
asymmetric information in insurance markets
health insurance- insurers want clients that are healthy and will live awhile but many people have hidden health problems if it has no way of distinguishing between clients, people with good health might have to pay more makes less attractive
one side of an economic relationship can do something that the other side cannot observe
hidden actions Ex: take car into mechanic don't have a clue whats wrong, you just want car fixed, but mechanic may try to maximize the amount you are charged or minimize the on the job effort-his actions are hidden from you
one side knows more than the other about product characteristics that are important to the other side
hidden characteristics buying a car-previous owner knows much more could hide defects when sellers have better information about a products quality than buyers do, lower quality products dominate the market
a merger in which one firm combines with another that produces the SAME type of product
horizontal mergers if coke and pepsi merged
in-kind transfer program that provides medical care for poor people; by far the most costly welfare program
medicaid-largest cost more than all others combined 1/4 of a states budget 70 million residents
the more tightly compensation is linked to individual incentives the more people behave in accordance with those incentives
if a letter carriers pay is based on customer satisfaction, the carrier will make a greater effort to deliver mail promptly and intact
tax payers are in sense the owners of government bureaus
if the bureau earns a profit, taxes may decline; if the bureau operates at a loss as most do, this loss must be made up by more taxes
farm subsidies
in 1937, one in four americans lived on a farm, the gov introduced a variety of policies that set floor prices for a wide range of farm products now only 1 in 5 americans lives on a farm but this program is still with us and subsidies in the 2008 Farm Act cost taxpayers 20 billion a year
poverty rates
in 1959 the elderly were the poorest group with a poverty rate of 35.2% has declined to 9.5% in 2013 13.6% for 18 to 64
monopolistic competition vs perfect competition
in the long run, neither earns eco profit difference traces to the demand curves facing individual firms in each of the two market structures a perfect competitors demand curve is a horizontal line drawn at the market price-produces at lowest possible average cost mono comp faces a downward sloping demand curve because its products differ somewhat from those of others-produces less than required to achieve lowest possible average cost firms in mono comp don't produce at minimum average cost mono comp spend more to differentiate their products-because they are identical in perfect-makes atc higher
coping with asymmetric information
incentive structure or an information revealing system all states now have lemon laws that protect buyers from defects will give estimate prior to work insurance-applicants have to undergo exam and answer questions about their history offer insurance to whole work group rather than one person
welfare programs that provide money and in-kind assistance to the poor; benefits do not depend on prior contributions
income assistance program means-tested program- income and assets must be below a certain level to qualify for benefits. fed funds 2/3 of welfare state 1/3
taxing people according to their marginal valuations of the public good may be efficient, but
it may not be fair if the ability to pay differs
how would tort reform legislation benefit the economy?
limiting product liability lawsuits, reducing insurance costs, and bringing some goods to the market that, because of liability suits, have all but disappeared
zero economic profit in the long run mono comp
low barriers to entry in mono comp mean that short run Econ profit attracts new entrants in the long run-this reduces demand faced by other firms entry continues until economic profit disappears-because entry is easy they earn zero profit in the long run losses drive some out of business which increases the demand for the remaining firms-firms continue to leave in the long run until the remaining firms have enough customers to earn normal profit but not economic profit demand, atc, and mc will be tangent for equilibrium
the sum of the marginal private cost and the marginal external cost of production or consumption imposed on society
marginal social cost if the marginal social cost exceeds the marginal benefit, too much is produced
oligopoly barrier to entry-economies of scale
minimum efficient scale is the lowest output at which the firm takes full advantage of economies of scale if a firms min efficient scale is large compared to industry output then only a few firms are needed to satisfy industry demand-auto plant of min efficient scale could make enough cars to supply nearly 5% of the US market, if there were 100 auto plants, each would supply such a tiny portion of the market that the average cost per car would be higher than if only 20 plants manufacture autos. in auto industry this is barrier because to compete with existing producers a new entrant must sell enough automobiles to reach a competitive scale
mergers and public policy
much of what the Antitrust Division in the US justice department and the FTC's bureau of competition do is approve or reject proposed mergers and acquisitions regulators challenge any merger that would create enhance or entrench marker power
goods that are non-rival but exclusive, have to pay for tv service but watching a show does not hinder other viewers from watching it
natural monopoly
problems with distribution benchmarks
no objective standard for evaluating them-what is the optimum level of distribution? measures money income after cash transfers but before taxes-neglect food vouchers and medical care for poor families focusing on the share of income going to each income quintile overlooks the fact that household size differs across quintiles broadening the definition of income to include changes in capital gains that is changes in net wealth from year to year only includes reported income
garbage in US
only 30 percent of garbage is recycled or incinerated and about 70 percent goes to landfills Japan recycles or incinerates 73 percent sending only 27 percent to landfills-sort in 21 categories
other goods are rival but nonexclusive, fish in the ocean are rival in the sense that every fish caught is no longer available for others to catch, the same goes for migratory game,
open access good
one shot versus repeated games
outcome depends on, prisoners dilemma is a one shot. in a repeated game each player has the opportunity to establish a reputation for cooperation and thereby may be able to encourage other players to do the same
how is the common pool problem solved?
output restrictions or taxes could force people to use the resource at a rate that is socially optimal and supports a sustainable yield fishing-limits the total catch, the size of fish, the length of fishing season, the equipment used, and other aspects of the business some industries limit the total catch and all firms to catch as much as they want until that number is met-causes madhouse when season opens-large fleets will operate at large scale for a few weeks until the number is met
water pollution
polluted drinking water in New Jersey has been linked to underweight and premature births, especially among infants born to less educated mothers major sources: sewage, chemicals (10 percent from factories, 2/3 from runoff), and oil
involves widespread benefits but concentrated costs
populist legislation group that benefits typically remains rationally ignorant about it but the concentrated group that gets whacked by taxes object strenuously little chance of approval
special interest legislation that has narrow geographical benefits but is funded by all taxpayers
pork-barrel spending
pricing tactics employed by a dominant firm to drive competitors out of business such as temporarily selling below marginal cost or dropping the price only in certain markets
predatory pricing
the agents objectives differ from those of the principal and one side can pursue hidden actions
principal agent problem any employer-employee relationship could become
government owned or government regulated monopolies
public utilities
earnings that exceed opportunity cost, some special advantage or some outright transfer or subsidy to a special interest groups, such as dairy farmers,
rents activity that interest groups undertake to secure these favors is rent seeking
effects of taxing productive activity
resource owners may supply less of the taxed resources because the after tax earnings decline some people shift from the formal, reported economy to an underground "off the books" economy when the gov taxes market exchange and the income it generates, less market activity and less income get reported
arguments against mono comp
results in too many suppliers and in artificial product differentiation but consumers are willing to pay a higher price for a wider selection what if half of the local restaurants closed to reduce excess capacity? -some consumers might be disappointed if a local favorite closed differences in consumer tastes help explain the existence of mono comp
distribution of wealth in recent decades
share of income going to the top fifth has increased and the share going to the bottom fifth has decline three out of four households in the top quintile have two or more poeple working decline in bottom is because single parents have increased
William G Shepard-trends in comp
sorted industries into four groups: 1. pure monopoly 2. dominant firm-single firm had more than half the market share and no close rival 3. tight oligopoly- the top four firms supplied more than 60% of market output with stable market shares and evidence of cooperation 4. effective competition, in which firms in the industry exhibited low concentration, low entry barriers and little or no collusion- increased significantly growth in competition from 1958 to 2000 can be traced to three sources 1. competition from imports 2. deregulation 3.antitrust policy
what do special interest groups do to the economy
special interest groups have little incentive to make the economy more efficient, they usually support legislation that transfers income to them even if the economy suffers they are made up of government workers themselves. they can vote for an otherwise support the elected official who will increase their pay and benefits
legislation with concentrated benefits but widespread costs
special-interest legislation benefit dairy farmers-they are the only ones that benefit but we are paying for it
requires any company that generates, stores, or transports hazardous wastes to pay to clean up any wastes that are improperly disposed of
superfund law-gave fed gov authority over sites contaminated with toxins
in-kind transfer program that offers low-income households vouchers redeemable for food; benefit levels vary inversely with household income
supplemental nutrition assistance program SNAP
income assistance program that provides cash transfers to the elderly poor and the disabled; a uniform federal payment is supplemented by transfers that vary across states
supplemental security income-fastest growing
payoff matrix
table listing the rewards or penalties that can be expected based on the strategy chosen
problems with antitrust policy
technological change fosters competition-makes antitrust policy less relevant competition may not require many firms-antitrust should not necessarily aim at increasing the number of firms in each industry victims abuses of taking too much compensation from firms that violated antitrust taking too much of an international approach bailing out troubled industries
an income assistance program funded largely by the federal government but run by the states to provide cash transfer payments to poor families with dependent children
temporary assistance for needy families
vertical integration
the expansion of a firm into stages of production earlier or later than those in which it specializes ex- steel company might decide to 1. integrate backward to mine iron ore and even mine the coal used to smelt the iron ore and 2. to integrate forward to fashion raw steel into various components
minimum efficient scale
the minimum rate of output at which economies of scale are fully exploited a firm should buy an input if the market price is below what it would cost the firm to make
if mono comp and perfect comp have same cost curves then
the mono comp produces less and charges more than the perfect comp does in the long run
dominant strategy equilibrium
the outcome achieved when each players choice does not depend on what the other player does
what do bureaus pursue?
they are "public servants" who try to serve the public as best as they can try to maximize their budget, with a big budget comes size, prestige, amenities, staff, and pay
extent that special interest groups engage in rent seeking
they shift resources from productive endeavors that create output and income to activities that focus more on transferring income to their special interests resources employed to persuade government to redistribute income and wealth to special interests are unproductive because they do nothing to increase total output and usually end up reducing it can decline productivity because resources are wasted and the earnings people expect from working and investing fall, so they may work less and invest less
redistribution overview
totaled 2.1 trillion in 2015 more than three times the amount spent on national defense in state pushes to 2.9
legislation that involves widespread costs and widespread benefits-nearly everyone pays and nearly everyone benefits
traditional public goods legislation national defense, road safety, a justice system, or cancer research
oligopolies-crowding out the competition
try to block out new entry by offering a variety of products a few cereal makers offer more than a dozen products each little are new
goods that up until the point of congestion, additional people can benefit from a subway, golf course, swimming pool, rock concert, or highway without diminishing the benefit to other users
uncongested goods-both non-rivial and exclusive and are therefore natural monopolies once they become congested, become private goods
market activity that goes unreported either because it is illegal or to evade taxes
underground economy ranges from unreported tips to drug dealers
varieties of oligopoly
undifferentiated oligopoly- in some like oil or steel the product is identical or undifferentiated so they sell a commodity such as an ingot of steel or barrel of oil differentiated oligopoly- automobiles or breakfast cereals, sells products that differ across producers-toyota Camry vs Honda Accord, not as sensitive about others prices the more similar the products the greater the interdependence among firms in the industry-because steel ingots are the same steel producers are quite sensitive to each others pricing-even a small rise in price sends customers to rivals
occurs when the amount of externality generated at a given rate of output can be reduced by altering the production process
variable technology-goal is to find the most efficient level of pollution for a given rate of output
a merger in which one firm combines with another from which it had purchased inputs or to which it had sold output
vertical merger Microsoft software going into dell hardware
a firm is more likely to buy a component rather than produce it if
1. buying the component is cheaper than making it 2. the component is well defined and its quality easily observable and 3. if there are many suppliers of the component
oligopoly barrier to entry-high cost of entry
100 hours of youtube videos uploaded every minute, had to come up with system to check videos as they are uploaded for copyright violations, so any competitor would have to spend the money to design a similar system to compete advertising alone can cost too much to compete with existing firms so established brands have a tremendous advantage
Nash equilibrium
a situation in which a firm or a player in game theory chooses the best strategy given the strategies chosen by others; no participant can improve his or her outcome by changing strategies even after learning of the strategies selected by other participants
game theory
examines oligopolistic behavior as a series of strategic moves and countermoves among rival firms. Analyzes the behavior of decision makers, or players, whose choices affect one another.
the notion that there is a limit to the information that a firms manager can comprehend and act on
bounded rationality as a firm takes on more functions, coordination and communication become more difficult distance can too-further from the headquarters harder it is solution is to reduce its functions to those where it has a comparative advantage
antitrust enforcement
either the Antitrust Division of the US Justice Department or the FTC charges a firm or group of firms with breaking the law usually act on a complaint made by a customer or competitor
special interests
elected officials may behave in a way that will try to maximize political support, so they may cater to special interests rather than serve the public interest
reg monopolies-setting a price equal to average cost
establish a price that provides the monopolist with a fair return. avc includes a normal profit so setting price equal to will provide a normal profit for the monopolist enhances social welfare compared to unregulated
"few sellers", "big business", industry dominated by just a few firms, perhaps three or four account for more than half the industry supply. Ex- steel, automobiles, oil, breakfast cereals, cigarettes, personal computers. interdependent, may be few suppliers but many demanders so no buyer has any control over the price
oligopoly
comparison between oligopoly and perfect comp
oligopoly price is higher profit also higher
collusion and cartels
only a few firms in oligopoly so they will collude (an agreement among firms in the industry to divide the market and fix the price) or conspire to rig the market. cartel-group of firms that agree to collude so they can act as a monopoly to increase economic profit-more likely among sellers of a commodity like oil or steel colluding firms usually produce less, charge more, block new firms, and earn more economic profit. consumers pay higher prices, and potential entrants are denied the opportunity to compete
occur when a firm buys products, such as auto parts, or services such as data processing, from outside suppliers. H
outsourcing
optimal search with imperfect information
the process of gathering consumer information can be considered non market work marginal cost- increases as you spend more time researching, travel greater distances to check prices and services and because the opportunity cost of your time increases as you spend more time acquiring information, mc curve for info slopes upward marginal benefit- higher quality for a given price or a lower price for a given quality. high at first but as you become more acquainted with the market, additional information yields less and less marginal benefit, slopes downward optimal search occurs where the marginal benefit just equals the marginal cost- where they intersect-when gathering the optimal amount they have less than full information price can differ among sellers because some consumers are unaware of lower prices elsewhere-search cost result in price dispersion or different prices for the same product also lead to quality differences
why do firms exist?
usually more efficient than market exchange because production requires the coordination of many transactions among resource suppliers using resource markets directly involves the cost of determining what inputs are needed and how they should be combined and the cost of reaching an agreement with each resource supplier over and above the direct costs of timber, nails, etc to make table minimize transaction costs and the production of economic activity
darker view of economic regulation
well organized producer groups expect to profit from economic regulation and persuade public officials to impose restrictions that existing producers find attractive such as limiting entry into the industry or preventing competition among existing firms producers have more to lose from regulation, and are more organized so are better able to bring about regulations that favor producers
the regulatory dilemma
whether to set price equal to marginal cost, which is socially optimal but requires a government subsidy setting price equal to marginal cost yields the socially optimal allocation of resources because the consumers marginal benefit from the last unit sold equals the marginal cost of producing that last unit monopoly may overstate costs so it can charge more