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Microeconomics Test Review III:  e-mail Walter with suggestion
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I. Public Goods Help When Markets Fail 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.  
      1. 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
  
   
2. Coase's Theorem
          a. 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 small. 
          b. He
demonstrated that individual maximizing behavior would correct these problems. 
          c. The government should only be involved when the number of
participants is so large as to make bargaining
              costs prohibitive.
          d. 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
        3. Solving pollution problem Orange Blossom Special: Externalities and Coase Theorem
            A. The market solution 
                
1. 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.
                 2. The resulting acceptable pollution would be fixed and sold as "rights" to pollute. 
                 3. Industrialization causes an increase in the demand to pollute and with a fixed
                     supply, the costs of rights to pollute  would increase. 4. Those who want goods
                     that pollute would simply have to pay!

MCS is marginal cost to society         MGS is marginal gain to society
MRPP is marginal revenue product of pollution   

 

           B. Other solutions
                  a. Taxes and subsidies      b. Regulation           c. Moral suasion
           C. For more insight into tradable rights read
Trading the Earth, the politics behind 
               tradeable pollution rights  by Sharon Beder.
           D. Using liability rules and lawsuits to eliminate externality costs.
                1. Laws and a damage recovery system exist.
                2. Cost, time delays and uncertainty as to outcome hamper this method.
D.  E
xternalities/transaction spillover are a cost or benefit that not transmitted through prices
       A Government Intervention is used to to affect externalities
       B. Externalities are the subject of chapter
31) The Economics of Government Subsidies.

  E. Democracy and economic efficiency       
       1. Majority rule is often inefficient
           a. A slight majority of people may vote less public spending in an area because theirbbperceived benefit is
               slightly below the good's average cost they would pay as a taxpayer.
           b. Voters for the activity (the minority) receive a benefit substantially greater than the average costs. 
           c. As a result society does not invest in something with a positive total return. 
           d. An example would be people who feel spending on education is
not beneficial and vote for less spending 
               in spite of the
substantial benefit received by children. 
           e. The public good is
voted less money even though total benefit exceeds total cost.
       2. Rent-seekers attempt to use public policy to get economic rent for   themselves at
            the expense of consumer surplus and in some cases, the public interest
        3. Special interest groups are a few people with much to gain from a political outcome. 
            a. Through political efforts they foster desired results at the expense of the many who
                acquiesce because individually they have little to lose.
         b. These groups often form Political Action Committees (PACs) to lobby n their behalf.
     4. Logrolling - wiki is trading votes and influence for projects which are not
        of interest in return for votes and influence for projects which
are of interest.

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II. Market Based Government Externality Intervention chapter 31
      A. Government subsidies are an attempt to provide externality benefits within reasonable cost limits.
      B. The need for government subsidies lie somewhere between the "clear" benefit of lowering the externality
           costs of severe
pollution to the questionable economic benefit of "pork barrel" (political patronage) 
           programs often generated by logrolling (trading votes in congress). See
Golden Fleece Award
      C. Often the desire by consumers to receive a surplus is balanced with industry's desire for increased 
           economic rent.

   
  D. Government subsidies use
direct controls and taxes affect demand and supply
          1. The Clean Air Act of 1990 limited pollution decreasing supply because of the increase in marginal cost
          2.
Affecting demand
              a. Tax credits, tax preferences, and loan programs for everything from agriculture to education  increase 
                  taxpayer demand by an amount related to the taxpayers' marginal tax rate.
              b. Government also supports industries such as defense and agriculture with large purchases.
        3. Affecting supply
             a. Supporting industries such as agriculture and education with subsidies (loans, inexpensive insurance) 
                 increases supply, lowering price and increasing quantity sold. 
             b. Organizations such as the Export-Import Bank of the United States, which supports export industries,
                  have similar effects.

 

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     E. Subsidizing agriculture markets (both buyers and producers)
         1. Farmers sell in an uncertain market
             a. Demand is very inelastic as people's physical needs are limited and lowering price will not substantially 
                 increase quantity sold.
             b. Demand increases slowly for most agricultural products as many are inferior goods for which quantity
                 demanded decreases as income increases.
             c. Supply is very inelastic in the short run as crops will grow only so fast.
             d. Supply is volatile because of the weather.
             e. Technology has caused supply to increase substantially.
             f. Annual supply fluctuations cause the prices farmers receive and resulting revenue to fluctuate considerably.

                                2. Supply and Demand for agricultural products       C3 Increased supply causes revenue to drop

 

III. Antitrust and Other Government Regulation
      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 analysis difficult.
                  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 brought vertical mergers as antitrust laws had made horizontal mergers difficult
                c. The 1960's and early 1970's was the time of conglomerates, which combined unrelated businesses.
                d. The 1980's brought 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
             practices.
         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
             trade illegal.
         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. Government regulation of industry has changed direction.
                1. International competition requires companies work together to develop technology and share in its 
                    high costs.
                2. Many feel government should foster cooperation among competitors with an industrial policy.
                3. Others feel the market system should be left to direct resource (factor) allocation.
            b. Regulation protecting individuals has become more prominent.
                1. Environmental Protection Agency (EPA) protects individuals from pollution (air, water, noise).
                2. Consumer Protection and Safety Commission (CPSC) protects consumers from unsafe products.
                3. Food and Drug Administration (FDA) protects consumers from dangerous food, drugs, cosmetics, etc.
                4. Federal Trade Commission (FTC) protects the consumer from unfair trade practices such as deceptive
                    advertising.
                5. Occupational Safety and Health Administration (OSHA) protects people while at work.
                6. Equal Employment Opportunity Commission (EEOC) attempts to eliminate workplace prejudice.
                7. National Labor Relations Board (NLRB) regulates activities between business and unions.

  
 D. Antitrust prosecutions
         1. Enforced by the antitrust division of the Justice Department
         2.
THEODORE ROOSEVELT took on the corporate monopoly Trusts
             that control railroad rates and routes and thus destroyed small towns and farms.
         3. Rule of Reason
             a. Applied by the Supreme Court in a 1911 antitrust case against
Standard Oil of New Jersey and the
                 American Tobacco Company 
             b. Court stated that behavior must be unreasonable in a competitive sense and anti-competitive effects 
                 must be demonstrated. 
             c. Both companies were found guilty. 
             d. The Court ruled that bigness alone was not against the law in1921 when it ruled that U.S. Steel was 
                 not a monopoly even though it controlled 50% of the market.
             e. Bigness alone was prosecuted by the Supreme Court in 1945 as it broke up Alcoa because it
                 controlled 90% of the aluminum market.
        4. Tight enforcement, which began in 1914, ended in the early 1980's.

 

 

IV. Distributing Income
    
  A. Income statistics

B. A Lorenz curve depicts income inequality 
     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)
         6. Discrimination
         7. Willingness to assume risk
         8. Luck 
             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. 
              Business Week, February 26, 2007 page 44
    
    10. Taxes
   E. Understanding poverty

  
     1. Poverty threshold (Chart) Originally set at three times a family's 
            minimum food requirement, it is now adjusted for inflation
       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
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