Microeconomics Test Review III
Goods Help When Markets Fail
View Entire Chapter 30
A. Private versus Public Goods.
1. Private good are
a. Rivalrous - only those who will to buy a good can have the benefit
b. Exclusive - bought by person A, it is not available to person B
c. Private goods satisfies an individual want while public good
satisfies a collective wants.
2. Public good is a good that is non-rivalrous and non-excludable
B. Demand for public goods
1. Demand for public goods is difficult to determine.
2. Once public goods are provided, everyone may use them.
3. The absence of a price mechanism to provide the rationing function
means politicians must decide which goods to produce.
4. Determining which goods to produce using cost-benefit analysis is difficult.
a. Many costs (MC) are difficult to predict and measure.
c. Many benefits (MB) are subjective and difficult to measure.
C. Externalities are costs or benefits not accounted for in the price of a product that
accrue to those outside or external to the market place. Please review Part IV of
6) Government's Economic Functions for an analysis of government action for an analysis
of government action to decrease externality costs and increase externality benefits
D. Coase's Theorem
1. Analysis by Ronald Coase revealed that government should not get involved with disputes over
externality costs when property ownership is well-defined and the number of people involved is
2. He demonstrated that individual maximizing behavior would correct these problems.
3. The government should only be involved when the number of participants is so large as to
make bargaining costs prohibitive.
4. For example, the government should not get involved in a noise pollution problem near an
amusement park because of the small number of people involved but should get involved
with acid rain generated in the Midwest and falling into New England because of the large
number of people involved Move to 3
E. Solving pollution
problem Orange Blossom Special: Externalities and Coase Theorem
1. The market solution
a. Applying diminishing returns, calculate the economically tolerable level of
pollution acceptable to society. This can be done by comparing the marginal
costs to society of pollution (supply), which increases with more anti-pollution
spending, with the marginal gain to society of a clean environment (demand),
which decreases with add additional spending.
b. The resulting acceptable pollution would be fixed and sold as "rights" to pollute.
c. Industrialization causes an increase in the demand to pollute and with a fixed
supply, the costs of rights to pollute would increase.
d. Those who want goods that pollute would simply have to pay!
F. Democracy and economic efficiency
Based Government Externalities Intervention
View Entire Chapter 31
E. Subsidizing agriculture markets (both buyers and producers)
III. Antitrust and
Other Government Regulation
View Entire Chapter 32
A. Understanding monopoly power
1. Society is concerned with the abuse of monopoly power which is the ability to
control market activity.
2. The economic effects of monopoly power are higher prices, a smaller quantity
sold, and economic rent to owners.
3. Measuring the amount of industry concentration
a. Standard industrial classifications (SIC) divide industries into homogeneous
concentrations such as apparel (23), male (3), and nightwear (2), resulting in
an SIC of 2332.
b. Concentration ratios measure the % of total industrial activity in areas such as
sales and employment for oligopoly industries
1. Four company industries are the most common.
2. Evidence is mixed as to whether concentration ratios are changing .
3. Increased inter-industry mergers and international competition make
4. Concentration rations are available from the US Census Bureau.
4 Types of business integration (mergers)
a. Horizontal integration results from a merger of competing companies.
U.S. Steel was formed with the merger of competing steel companies.
b. Vertical integration results when companies that have supply dealings merge.
Standard Oil combined refineries and oil transportation systems.
5. A brief history of the merger movement
a. The late 19th century brought trusts (controlling corporations by controlling their boards
of directors) and the need for antitrust laws to regulate the many horizontal mergers of
America's Gilded Age.
b. The 1920's had vertical mergers as antitrust laws had made horizontal mergers difficult
c. The 1960's and early 1970's had conglomerates, which combined unrelated businesses.
d. The 1980's had corporate raiders who broke up conglomerates many using junk (high risk)
bonds to finance leverage (high debt) buyouts.
e. The 1990's brought a return to mergers, many of them combining international companies.
6. Price fixing from Wikipedia
B. Antitrust laws
1. Sherman Antitrust Act of 1890 made monopolies and attempts to monopolize illegal.
Combinations, contracts, and conspiracies in restraint of trade were made illegal.
2. Clayton Act of 1914 prohibited tying contracts (tying the purchase of product A to
that of product B), price discrimination, and stock ownership of competitors which would
substantially lessen competition.
3. Federal Trade Commission Act of 1914 created the FTC to control deceptive business
4. Robinson-Patnan Act of 1936 made predatory pricing illegal
5. The Wheeler-Lea Act of 1938 amended the FTC Act to make unfair and deceptive
6. Celler-Kefauver Antimerger Act of 1950 made the purchase of assets of another company
illegal if the purchase would substantially lessen competition.
C. The changing role of government regulation
1. Before there was regulation there was ANDREW JACKSON who took on the eastern
bankers because he felt it had excessive power.
2. Important regulating agencies
a. Interstate Commerce Commission (ICC)-rails and trucking
b. Federal Aviation Administration (FAA)-air travel
c. Federal Communications Commission (FCC)-airways
d. Securities and Exchange Commission (SEC)-issuers of financial instruments such as
stocks and bonds
3. A move toward deregulation began by Margaret Thatcher in the 1970's spread to the
United States and Western Europe in the 1980's.
a. Many felt federal government regulation represents a costly and inefficient misallocation
of economic resources.
b. Railways, trucking, airlines, and financial institutions were deregulated in the late
1970's and 1980's.
1. Some deregulation activities were very costly (bank bailout of the late 1980's).
2. Overall, the jury is still out on the success of deregulation.
4. Regulators are
redirecting efforts away from maintaining competition toward social regulation.
A. Income statistics
|B. A Lorenz curve depicts
by plotting the percentage of income (Y)
received by different percentages of the
population. A 45-degree line represents
perfect equality as 10% of the population
receive10% of the income and 35% of the
population receive 35% of the income,
etc. Perfect inequality would be close to
the x-axis as 99% of the population
receive no income
|C. The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality. It has found application in the study of inequalities in disciplines as diverse as The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality. It has found application in the study of inequalities in disciplines as diverse as economics, health science, ecology, chemistry and engineering. from Gini coefficient of Wikipedia|
D. Causes of income inequality
1. Personal endowments differ (mental, physical, and personal abilities)
2. Human capital investments differ (education and training)
3. Job characteristics cause people to accept differing amounts of
compensation (white vs. blue collar, job prestige, job risk)
4. Wealth generates income
5. Market power (unions, associations such as AMA, ABA, and AARP)
7. Willingness to assume risk
a. Recently, 2001-2202, (like 1991, and 1980) was not a great time
to be graduating from college and seeking a job.
b .The worst time was 1929 -1938. My dad graduated from Tufts
College in 1933. He got his first real job in 1937 and because of
WWII, he didn't get his first new car until 1947.
9. Power, CEOs have the power and no one can stop them.
E. Understanding poverty
1. Poverty threshold (Chart) Originally
set at three times a family's minimum food
requirement, it is now adjusted for inflation
Source Business Week, 2/26, 07 p 44
2. The poverty rate is decreasing.
a. 32.0% of the population lived in poverty in 1950.
b. Just over 11% was the poverty rate through the early 1970's.
c. 15.2% of the population during 1981-82 recession which is the most recent
poverty rate peak.
d. 14.2% of the population (35.7 million people) in 1991 lived in poverty.
e. Between 1970 and 1990 the percentage of children living in poverty
increased from 14.9% to 19.9% with the corresponding increases for
white, black, and Hispanic children being 10.5% to 15.1%, 41.5% to
44.2%, and NA to 33.9% respectively.
3. Federal programs to help the poor
a. Payroll tax programs
1. Old Age, Survivors, and Disability Health Insurance (social security)
2. Medicare pays medical costs for social security recipients
3. Unemployment Compensation (paid by employers)
b. Programs financed from general revenues
1. Supplemental Security Income (elderly and disabled)
2. Aid to Families with Dependent Children (AFDC)
3. Food Stamps
4. Medicaid pays health care costs for the poor