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| | ==Regulation, including Antitrust Laws== | | ==Regulation, including Antitrust Laws== |
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| − | The response of government to externalities and to the very different problem of monopolies is regulation. Regulate the polluters; police the trading of music over the internet; and break up the monopolies like Standard Oil, AT&T, and perhaps Microsoft (which barely avoided a break-up by the skin of its teeth!). | + | The response of the government to externalities and to the very different problem of monopolies is this: '''''regulation'''''. Regulate the polluters; police the trading of music over the internet; and break up the monopolies like Standard Oil, AT&T, and perhaps Microsoft (which barely avoided a break-up by the skin of its teeth!). |
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| | Negative externalities and monopolies become popular targets for politicians from time to time. Democrats campaign on a platform of increasing regulation to protect the environment against big business. “Don’t let companies pollute your lake and streams,” environmentalists say. A hundred years ago, President Teddy Roosevelt broke up big monopolies and cartels and became immensely popular for it. | | Negative externalities and monopolies become popular targets for politicians from time to time. Democrats campaign on a platform of increasing regulation to protect the environment against big business. “Don’t let companies pollute your lake and streams,” environmentalists say. A hundred years ago, President Teddy Roosevelt broke up big monopolies and cartels and became immensely popular for it. |
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| | An additional problem with regulations has arisen in the past ten or twenty years. Big businesses have learned how to influence regulators by holding out the possibility of hiring them. Fifty years ago, large companies had policies against hiring those who regulated them. But today, “regulatory capture” is pervasive. Regulators curry favor with the companies they regulate in order to obtain jobs at twice their government salary. The regulators end up helping the large companies at the expense of smaller companies and the public. The regulators have been effectively “captured” by big companies. The fox ends up guarding the chicken coop. | | An additional problem with regulations has arisen in the past ten or twenty years. Big businesses have learned how to influence regulators by holding out the possibility of hiring them. Fifty years ago, large companies had policies against hiring those who regulated them. But today, “regulatory capture” is pervasive. Regulators curry favor with the companies they regulate in order to obtain jobs at twice their government salary. The regulators end up helping the large companies at the expense of smaller companies and the public. The regulators have been effectively “captured” by big companies. The fox ends up guarding the chicken coop. |
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| − | Government regulation almost never tells a company how much to produce. In only in a few industries, like the public utilities of the gas and electric companies, does government set the prices at which goods or services or sold. In most markets in the United States, the price fluctuates freely based on supply and demand. | + | Government regulation almost never tells a company how much to produce. In only in a few industries, like the public utilities of the gas and electric companies, does government set the prices at which goods or services are sold. In most markets in the United States, the price fluctuates freely based on supply and demand. |
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| − | But there is enormous regulation in the United States of all businesses concerning matters other than price and quantity. Defenders of the massive amounts of regulations will say it is necessary to protect the public. Critics of the regulations point out that government is gaining more power and control by imposing these regulations, and is frustrating the efficient operation of the free market. Sometimes a CLEP exam question will expect an answer that is favorable to regulation, when many economists (such as Ronald Coase) would really be critical of regulation. | + | But there is enormous regulation in the United States of all businesses concerning matters other than price and quantity. Defenders of the massive amounts of regulations will say it is necessary to protect the public. Critics of the regulations point out that government is gaining more power and control by imposing these regulations, and the regulations frustrate the efficient operation of the free market. Sometimes a CLEP exam question will expect an answer that is favorable to regulation, but many economists (including Ronald Coase) are very critical of regulation by government. |
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| − | All admit that the government redistribute wealth in society through taxation and public expenditures. Wealth is lost as part of the redistribution, as many government workers are paid in the middle between the taking of wealth from one person and giving money to another. In 2008, "the average salary for a federal government employee was $79,197. The average salary for a private employee in the United States was $49,935. ... Orange County Sheriff Sandra Hutchens earns almost half a million dollars a year between her current salary as sheriff and her pension from the Los Angeles County Sheriff's Department. And Ms. Hutchens is not alone. Orange County CEO, Tom Mauk also earns close to $500,000 a year with his current salary from the County and his pension from working for La Habra."<ref>http://www.ocregister.com/articles/benefits-215118-government-salary.html</ref> Superintendents of public school districts in New Jersey are paid hundreds of thousands of dollars each year in salaries and pensions. Voters might wonder what they are getting in return for paying so much in taxes.
| + | Taxation and public expenditures are considered to be worse than regulations. Taxation and public expenditures are the most direct ways that government redistributes wealth in society. Wealth is lost as part of the redistribution, as many government workers are paid as middlemen in administering the system. Some of these government workers are very highly paid:<ref>http://www.ocregister.com/articles/benefits-215118-government-salary.html</ref> |
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| | + | :In 2008, "the average salary for a federal government employee was $79,197. The average salary for a private employee in the United States was $49,935. ... Orange County Sheriff Sandra Hutchens earns almost half a million dollars a year between her current salary as sheriff and her pension from the Los Angeles County Sheriff's Department. And Ms. Hutchens is not alone. Orange County CEO, Tom Mauk also earns close to $500,000 a year with his current salary from the County and his pension from working for La Habra." |
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| | + | Superintendents of public school districts in New Jersey are paid hundreds of thousands of dollars each year in salaries and pensions. In electing a new governor who advocates lower taxes, voters may have been wondering what they are getting in return for paying such high taxes in New Jersey. |
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| | ===Honors Example=== | | ===Honors Example=== |
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| − | Consider an example of a government regulator telling a monopoly what price to sell it this. This rarely happens, but public utilities (gas and electric companies) are an example where government must approve any rate increases. | + | Consider an example of a government regulator telling a monopoly at which price to sell his goods. This rarely happens, but public utilities (gas and electric companies) are an example where government must approve any rate increases. |
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| − | Monopolies sell where marginal revenue equals marginal cost, or MR=MC. But that is at a higher price than if there were perfect competition. In perfect competition, the goods sell where P=MC, or where the marginal price curve intersects the demand curve. That is at higher quantity of output than where the marginal cost curve intersects the marginal revenue curve. Always remember: the best price point for the public is the price when there is perfect competition, and there is more output (and more consumer surplus because there is more output) at that equilibrium price in the free market. | + | Monopolies sell where marginal revenue equals marginal cost, or MR=MC. But that is at a higher price than if there were perfect competition. In perfect competition, the goods sell where P=MC, or where the marginal price curve intersects the demand curve. That is at higher quantity of output than where the marginal cost curve intersects the marginal revenue curve. Always remember: the best price point for the public is the price when there is perfect competition, and there is more output at that equilibrium price in the free market. More output means more benefits to the public, and more consumer surplus. |
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| | But what if ATC > P for this monopoly? In that case, forcing P = MC for this monopoly would require a subsidy by the government. Without a subsidy, the company shuts down. Alternatively, if regulators set P = ATC for this monopoly, then it does not need a subsidy but it is not producing an optimal output Q. | | But what if ATC > P for this monopoly? In that case, forcing P = MC for this monopoly would require a subsidy by the government. Without a subsidy, the company shuts down. Alternatively, if regulators set P = ATC for this monopoly, then it does not need a subsidy but it is not producing an optimal output Q. |
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| − | Even in the case of a monopoly, government price controls are almost never desired from an economic perspective. However, they may be popular politically. | + | Even in the case of a monopoly, government price controls are almost never desirable from an economic perspective. However, they may be popular politically. |
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| | == Derived Demand and Factors of Production == | | == Derived Demand and Factors of Production == |