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.