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| | If marginal revenue cannot be positive, and it cannot be negative either, then there is only one possibility left: marginal revenue must be zero. | | If marginal revenue cannot be positive, and it cannot be negative either, then there is only one possibility left: marginal revenue must be zero. |
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| | ==Externalities== | | ==Externalities== |
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| | Keep in mind that public goods are provided by government because it is difficult to exclude people from using them. The theory is that taxes should pay for them rather than trying to charge people individually, because it is so difficult to do so. Private goods do not have that problem of charging people individually, so there is no need for government to provide private goods. | | Keep in mind that public goods are provided by government because it is difficult to exclude people from using them. The theory is that taxes should pay for them rather than trying to charge people individually, because it is so difficult to do so. Private goods do not have that problem of charging people individually, so there is no need for government to provide private goods. |
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| − | ==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 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!). |
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| | Sometimes the pendulum swings the other way. Ronald Reagan became president by ridiculing the vast amounts of regulation of free enterprise. “Get the government off the back” of businesses and the people. He sought “less government.” He would tell stories of senseless regulations, like one requiring American Indians working on high bridges to wear life-preservers in case they fell. First of all, the life-preservers were unbearably hot and of doubtful value even to those who fall. Second of all, the regulations applied even when there was no water below! | | Sometimes the pendulum swings the other way. Ronald Reagan became president by ridiculing the vast amounts of regulation of free enterprise. “Get the government off the back” of businesses and the people. He sought “less government.” He would tell stories of senseless regulations, like one requiring American Indians working on high bridges to wear life-preservers in case they fell. First of all, the life-preservers were unbearably hot and of doubtful value even to those who fall. Second of all, the regulations applied even when there was no water below! |
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| − | In the free market, change is nearly instantaneous to new developments. When a company announces it is bankrupt, it’s stock value drops to near $0 within minutes. However, it can take the government months or years to adjust to a new development. Louis Freeh, director of the FBI for eight years, was so far behind technologically that FBI agents had to use their more advanced personal computers at home in order to exchange large files! | + | In the free market, change is nearly instantaneous to new developments. When a company announces it is bankrupt, its stock value drops to near $0 within minutes. However, it can take the government months or years to adjust to a new development. The Post Office is far behind Federal Express in technology and efficiency. |
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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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| − | Finally, imagine a regulator imposing price controls on a natural monopoly. Forcing P = MC for a natural monopoly, however, would require a subsidy by the government if ATC > P. Without a subsidy, the company shuts down. Alternatively, if regulators set P = ATC for the natural monopoly, it does not need a subsidy but it is not producing an optimal output Q. Government price controls are almost never desired from an economic perspective. However, they may be popular politically.
| + | 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. |
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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. |
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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 in salaries and pensions. Voters might wonder what they are getting in return for paying so much in taxes. |
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| | + | ===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. |
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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. |
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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. |
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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. |
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| | == Adversity and Suffering == | | == Adversity and Suffering == |
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| | 10. | | 10. |
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| | + | == References == |
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| | + | <references/> |
| | [[Category:Economics lectures]] | | [[Category:Economics lectures]] |
| | {{DEFAULTSORT: Economics Lecture 10}} | | {{DEFAULTSORT: Economics Lecture 10}} |