Notes I Economics 430
Social problems, conflicts, arise and from time to time, there are voices crying out for public policies to deal with those problems. We are going to be guided by economic theory in analyzing the problems to examine the problems and to look at alternative solutions (including doing nothing).
Theory and Policy:
17th century Monte Lupo, Italy
A few definitions:
An institution is a scheme of values mobilized and coordinated to accomplish a particular function or a custom, practice, relationship, or behavioral pattern of importance in the life of a community or society.
A market is an organized process by which sellers and buyers exchange goods and services for money. Markets may be local, regional, national or international. Cement, barber, local markets because of transportation economies, so exchange and competition are limited geographically.
Industry usually denotes a broader concept than markets, includes several products and larger geographic area.
Markets use the inputs of people’s preferences, translated or filtered through their incomes, to come up with answers to the questions: 1) what goods and services shall we produce, and how much? 2) how are goods and services produced? 3) who shall get the goods and services produced? 4) how can we react to changes in preferences, incomes and technologies? Markets are decentralized processes that coordinate the decisions of millions of people.
Governments do something similar. They use people’s preferences, translated by their votes, to formulate decisions on rules (rule making, rule enforcing, and rule adjudicating—the 3 branches of government).
Markets: The good, the bad and the ugly
Maybe another way of looking at this section is that we will first examine how markets work in the perfect world of perfect competition and no transactions costs (including no cost of information). Then, we will proceed to look at markets under more realistic conditions.
A little analysis first—coming up with criteria.
Consumer Surplus Analysis www.nicholls.edu/mcoats/note12.htm
Production Efficiency--requires that there are no producers producing who have higher costs than those who could produce and are not—the lowest cost producers are in the market.
Allocation Efficiency—requires that there are no buyers in the market who value the good less than those who are not in the market.
Marginal Social Benefit and Marginal Social Cost Analysis
Pareto Optimality—A situation in
which no one can be made better off without making someone else worse off. www.nicholls.edu/mcoats/note11.htm
No diagramming here, as it is a bit too complex. Think of maximizing the discounted present value of net benefit triangles on out into the future.
Achieving static efficiency:
Problems for markets:
Common Property
External costs www.nicholls.edu/mcoats/note15.htm
External benefits
Public Goods (nonexcludable goods) www.nicholls.edu/mcoats/note15.htm
Transactions costs
Imperfect Competition: monopoly power and monopsony power
Imperfect Information
How do markets do in terms of dynamic efficiency?
Speculation
Rawls, Nozick
Merit Goods: Housing, food, medical care, education, arts?
Demerit Goods: Tobacco, Drugs, Alcohol, Firearms, Porn, Gambling?
A. problem recognition and preference articulation
1. “income distribution” “one person, one vote”
2. complete participation of those affected—non-voters & future generations?
3. full information—complete knowledge of alternatives
B. preference aggregation (voting rules)—Should we count Dimpled Chads?
1. majority rule? Median voter, tyranny of the majority
2. Unanimity, PO, Wicksell and near unanimity
3. Cost of Decisions—Calculus of Consent
4. Unanimous vote on income distribution?
5. Majority rule and income distribution—Tideman/Coats voting system
C. Picking appropriate policy for the problem—good analysis of the problem, and picking the right means to the ends—Microsoft?
Impartial, consistent, efficient, clear, dependable, unobtrusive
D. Measuring effects of policy
Benefit-Cost Policy -- Cons. Surplus Analysis
E. Enhancing Dynamic Welfare
A. Incentives and Interested Parties
B. Monopoly Bureaus
C. Voter Ignorance and Nonparticipation, selective apathy
D. Rent-Seeking Behavior—the single, land-based casino
E. Public Goods, Private Goods and Publicly Provided Goods
F. Governments as polluters—municipal sewerage
G. Bundled Purchases
H. Delay, Myopia—How long does it take Govt. to react to a problem?
How far ahead do politicians really care about?
Intro
to Theory of Antitrust and Regulation
Old Paradigm
Structure -> Conduct -> Performance (Linear/Serial)
New Paradigm?
Government Policies Concerning Markets
|
Policy
Type |
Structure |
Conduct |
Performance |
|
Maintenance
of Competition/Antitrust |
1.
Monopoly Law 2.
Merger Laws |
1.
Price Fixing Law 2.
Price Discrimination Law 3.
Exclusive Dealing Law 4.
Tying Law |
|
|
Natural
Monopoly Regulation /Public Utility |
|
1.
Price Regulation/ phone, elect., nat gas 2.
Abandonment and/or extension of service |
Profit
Regulation Service
Requirements Safety
Innovation
Regulation |
|
Information
Improvement |
1. Disclosure of information 2.
Grading/standards/ weights/measures 3.
Trademark and copyright protection |
1.
False Advertising 2.
Deceptive Practices |
|