| Line 77: |
Line 77: |
| | While most of us support a cleaner environment, efficiency is not improved by the government interfering in the free market and reducing output. As the Coase theorem states, government interference and more transaction costs do not improve efficiency. That said, you can pick up one or two easy points on the CLEP exam ''by assuming that environmental regulation increase efficiency by protecting the "resource" of the environment for its better use''. | | While most of us support a cleaner environment, efficiency is not improved by the government interfering in the free market and reducing output. As the Coase theorem states, government interference and more transaction costs do not improve efficiency. That said, you can pick up one or two easy points on the CLEP exam ''by assuming that environmental regulation increase efficiency by protecting the "resource" of the environment for its better use''. |
| | | | |
| − | Outside the topic of government regulation, there are no biased answers. Do not choose one answer instead of another for reasons of bias except in one or two rare cases. | + | Outside the topic of government regulation, there are no biased answers. Do not choose one answer instead of another for reasons of bias except in one or two rare cases. |
| | + | |
| | + | ===Other Questions Concerning Government=== |
| | + | |
| | + | Note that when companies are allowed to pollute without paying for it, their marginal cost (MC) is artificially lower than it should be. The companies are avoiding the cost of their own pollution. A lower MC means they will produce more goods than if their MC were higher. The term “marginal social cost” is used by economists to represent the true cost of their activities, including the cost of their pollution. In theory, perhaps there are free market responses to the polluter, such as people asserting property rights in the rivers being damaged. Historically, it has taken government regulation to reduce the negative externality. |
| | + | |
| | + | In other areas unrelated to pollution, government establishes price floors, supports and ceilings. Do we all recall the differences? Price “ceilings” (or controls) are the easiest: the government says that the good cannot be sold for a higher price. Just as you cannot reach above your ceiling, the price is prohibited from rising above the ceiling that the government sets for it. It would be requiring gas to be sold for no more than $1.50, for example. The quantity supplied will decrease (move down the supply curve), while the quantity demanded will increase (move up the demand curve). Shortages result. |
| | + | |
| | + | What is a price floor? Just the opposite of a ceiling. We cannot reach below the floor, and a price floor prevents the price from falling below a certain level. It would be a government law that prohibited milk from selling for less than $2 a gallon, for example. It would be intended to help the suppliers, such as dairy farmers. What happens when government imposes a price floor? There is a surplus of the good, as supply exceeds demand. |
| | + | |
| | + | Now, how about a price support? That occurs when the government buys large quantities of good, such food, at prices higher than the competitive equilibrium. The government does this to “support” a higher price, instead of passing a law to require a higher price. A price support is designed to help the firms producing the goods, such as farmers. The rationale is that farmers are politically important and that pure competition is too brutal on their business and their lives, and also that foreign countries engage in the same practices. The effect of a “price support” is similar to a price floor: it creates a surplus of the good when the support is above the equilibrium price |
| | + | |
| | + | When government regulates labor, the analysis is similar to its regulation of price. A “price floor” is created by the minimum wage: the buyer (an employer) must pay at least a certain amount for a service (labor). The minimum wage creates an oversupply of the service: too many workers. Not all of them will be able to obtain jobs at a wage higher than equilibrium. Unemployment results from a minimum wage that is higher than the equilibrium wage. |
| | | | |
| | === General Preparation Advice === | | === General Preparation Advice === |