Economics 2152A/B Study Guide - Midterm Guide: Private Good, Public Good, Marginal Cost

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greenelephant826

10 Feb 2015

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Vertical integration: the combination of different stages of production. Bringing them together can create a super monopoly. Consider a sports franchise and a broadcaster that each have a monopoly. The team is the upstream firm it produces output and floats it downstream to the. The upstream firm charges the monopoly price to the downstream firm, who considers that price as its marginal cost. Consumers face the double whammy of 2 monopolies. If the broadcaster buys the sports franchise, it no longer pays pu for the broadcast rights, and the price to the consumer falls. Purpose: leagues exist to help teams to maximize profit. Leagues perform functions that no one team can do alone. Establish rules of play, discipline, scheduling, bargain on behalf of team owners, conduct advertising, create framework for the entry of new players, promote competitive balance, decide on revenue sharing. Admitting a new team brings benefits and costs.

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Public subsidies for new stadiums and arenas are commonly justified on the basis of economic benefits they will confer on the local economy rather than on public consumption externalities or on the value of an enhanced community image. Yet there is virtually no evidence of any perceptible economic development benefits from sports teams or stadiums. How, then, have sports leagues been so successful in persuading government officials and voters to subsidize their industry when they seem to promote the losing argument? Many referendums on using tax revenue to construct sports stadiums and arenas have been closed (Fort, 1997). At the end of the controversy, however, almost all cities have contributed public funds to subsidize private, for-profit teams owned by some of the wealthiest individuals in the world. The close votes suggest that stadium proponents-team owners and players-have been quite sophisticated in their appeals. If the votes had been overwhelmingly in favor of the subsidies, the proponents probably sought too little. If the voters had not generally approved the subsidies, they asked for too much. Part of the explanation for the success of subsidies for sports stadiums relies on the distribution of benefits and costs. Only a small proportion of people in any metropolitan area attend professional team sports contests. But those who do often are intensely interested. Thus substantial benefits accrue to some individuals, motivating them to become politically active in supporting the use of tax revenue to procure or retain a team. Team owners and players are also well organized and have low-cost access to the media in their effort to promote subsidization. In contrast, most voters do not find it in their interest to oppose actively a referendum that may cost them $25 or $50 per year in additional taxes. The issue is complex, the subsidies are indirect, and the proponents have almost all of the information. Those who are motivated to oppose the subsidies frequently are poorly funded, disorganized and politically naive. Misleading "economic impact statements" commissioned by the proponents of subsidization often confuse the public. As we have seen, these studies are fraught with methodological errors that may be easily overlooked for those not trained in economics. Given the close votes, the studies can be enormously effective even if they deceive only 2 or 3 percent of the voters

There are various ways to correct monopoly abuses, including government ownership, "public utility" type regulation, and injecting competition into the industry. Direct regulation has more appeal when there is a clear natural monopoly, which does not appear to be the case for professional sports. No one believes that two baseball teams in Chicago cause problems similar to those that would arise from duplicate water or electricity distribution systems. Direct regulation also risks the usual inefficiencies associated with political rather than economic motives, muting incentives for working, saving, investing and entrepreneurial activity. New entry would introduce competition to the monopoly sports leagues, but it is unlikely. Many have tried, but few have succeeded (Quirk and Fort, 1992, chs. 8-9). The successes came primarily in the 1960s and 1970s, after a long period during which franchise expansion in the major sports leagues failed to keep pace with population growth, and in the midst of rapidly increasing demand for sports entertainment fueled by the coming of sports interest age of the post-World War II baby boomers and the expansion of access to television. Those were days before astronomical broadcast rights contracts and stadium subsidies had driven players' salaries beyond the realm of normal incomes, and before the leagues realized that they could restrict the number of franchises so much as to attract an entirely new league. Today it would be difficult, if not impossible, for a new league to successfully enter any of the four major team sports, and individual teams cannot enter without the cooperation of incumbents because they would have no one to play. Unfortunately, the successful entrants three decades ago-the American Football League, the American Basketball Association and the World Hockey Association-all too quickly recognized their financial interest in joining rather than fighting the established leagues whose monopoly power they had challenged. In the case of football, in 1966 Congress even went so far as to pass special interest legislation that immunized the merger of the American and National Football Leagues from antitrust challenge. One possible road to remedy would be for the U.S. Conference of Mayors and the National Governors' Association to agree not to use publicly collected monies to finance the construction or maintenance of a sports facility for a privately-owned team (Rosentraub, 1997). While initiatives to this effect have been brought before these groups in the past, no action has ever been taken. The problem is that at any one point in time there are just a few cities or states affected by the demand for a new sports facility. Those mayors or governors not facing a threat are not inclined to alienate the professional leagues with whom they have or want a relationship. Moreover, the prospect of attracting a team with a subsidy may be too great a temptation for any one community to resist, and there is virtually no cost to a community for cheating on such a voluntary agreement. A variant of this scheme was proposed by U.S. Senator Daniel Patrick Moynihan, who proposed a bill that would have prohibited the use of the federal tax exemption on municipal bonds for sports facilities where privately-owned teams would play. Like many similar efforts, Moynihan's bill died in committee. Divestiture may be the best remaining option. Each of the professional sports leagues is now approaching 30 teams. Dividing each sport into, say, four separate leagues could instill important elements of competition without destroying the value of a championship playoff. Competition could prevail in the market for players and, more importantly, in the market for team locations. Individual leagues might be exempted from antitrust prosecution for intra-league coordination, but coordination other than to arrange uniform playing rules and a championship playoff among the leagues would be prohibited. The National Collegiate Athletic Association (NCAA) provides an example of such an organization of leagues. Although the NCAA is intimately involved in the regulation of the player labor market, it does not constrain either the size of college sports leagues or team locations. The various leagues participate jointly in many national championship competitions. Divestiture would solve many of the problems plaguing professional sports. The competitive imbalance problem would be ameliorated as teams with large revenue bases found their home territories invaded by entrants from smaller revenue bases in the other leagues. Such invasions would persist until revenue potential per team was approximately equal on the margin. Cities that could financially support new franchises would find entry into one of the leagues easier and (much) cheaper as the leagues competed to add viable new locations. Attractive places for sports teams (like Los Angeles for football or Washington, D.C., for baseball) would find interest from currently struggling franchises and probably would not have to provide a free stadium or arena to procure a team. Television networks could play the competitive leagues off against each other in bidding for broadcasting rights, which would likely fall precipitously. The most serious risk in a sports industry comprised of competing leagues is the possibility that one league will eventually be viewed as "better" than the others, and the weaker leagues will fail or be absorbed by the stronger leagues. Minimally, the legislation would be needed to permit periodic divestiture if this should occur. An alternative approach is to prohibit existing leagues from exercising collective control over team relocations. This approach would reduce the disparity in revenue potential because some teams from markets with lower revenue potential would invade the geographic territories of teams currently monopolizing the largest revenue potential markets. The result, for instance, could easily be more baseball teams in New York City and Los Angeles. Competitive team imbalance would decline because the revenue potential would equalize across teams as the geographic territories of current "haves" were invaded by current "have nots." Subsidies from cities to teams would shrink because leagues would be unable to prevent teams from competing to enter a city offering attractive market potential. Player salaries also would decline because both local television revenues and government subsidies would decline. Some cities would lose teams initially, but this would apply political pressure on the leagues to expand the number of franchises, thereby helping to attenuate the ultimate source of their market power. Franchise mobility may increase in the short run but should stabilize once a balance between demand for and supply of teams is established. Introducing competition into the market for franchise locations could be accomplished by either congressional or judicial action. Even with competitive leagues, existing teams would have some leverage in negotiating for publicly subsidized playing facilities because fans develop emotional ties to particular teams. The collection of such ties constitutes a sunk investment in a particular team for a community and can rationalize subsidies to retain a particular franchise that would not be sensible if the identity of the service provider were of no concern to fans. A common solution to such contracting problems (similar to those which arise between a coal mine and a single purpose railroad spur to the mine) is common ownership-that is, vertical integration. In the context of professional sports, vertical integration would constitute common ownership of the team and the emotional investment in it-in short, team ownership by the municipal government. Unfortunately, at the top level, none of the four major team sports leagues in the United States permit municipal ownership.9 This restriction is also subject to challenge under the Sherman Antitrust Act, but unless or until it is overturned, it is another way in which monopoly power stands in the way of economic efficiency in professional sports. Implementing either divestiture or a competitive market for team relocations would be a substantial challenge. Either reform would make team owners and players worse off. Both groups are well organized and have powerful incentives to maintain any monopoly power that enhances team revenues. Taxpayers, in contrast, would end up better off as a result of either reform. We believe that potential gains to the winners exceed the likely burden on the losers because the reforms, which rely on competitive prices to shape the allocation of resources between the private and public sectors and within the public sector itself, should improve efficiency. However, because the winners are a diffuse group of numerous individuals with but modest individual incentives to press for reform, the prospects for change are grim.

------------------------------------------------Question

According to the article by Siegfried and Zimbalist, what do they recommend as the most effective policy for reducing team bargaining power with state and municipal governments? That is, what policy do they suggest so that local governments will no longer have to subsidize new stadiums? Explain.

viridianpig408

Exam coming up pretty soon and I just need to see the step by step solutions to these problems in order to make sure I am doing them correctly.
Greatly appreciated!

1. Workers in a certain job are trained by the company, and the company calculates that to recoup its investment costs the workersâ wages must be $5 per hour below their marginal productivity. Suppose that after training, wages are set at $5 below marginal productivity, but that developments in the product market quickly (and permanently) reduce marginal productivity by $2 per hour. If the company does not feel it can lower wages or employee benefits, how will its employment level be affected in the short run? How will its employment level be affected in the long run? Explain, being sure to define what you mean by short run and long run!

2. The manager of a major league baseball team argues: âEven if I thought Player X was washed up, I couldnât get rid of him. Heâs in the third year of a four-year, $24 million deal. Our team is in no position to eat the rest of his contract.â Analyze the managerâs reasoning using economic theory.

3. Assume that the labor supply curve to a firm is the one given in Problem 1 above that is, (E=5W). If the firmâs marginal revenue product of labor (MRPL) 240 â 2E, what is the profit-maximizing level of employment (E* ) and what is the wage level (W * ) the firm would have to pay to obtain E *workers?

4. Major league baseball teams scout and hire younger players whom they then train in the minor leagues for a period of three to five years. Very few of their trainees (perhaps 5 percent) actually make it to the major leagues, but if they do they are bound to the team that owns their contract for a period of five years. After five years, the player can become a "free agent" and choose any major league team on which to play.Keeping in mind that the major league teams pay the costs of, but derive no revenues from, their minor league teams, what would be the most important predictable effects of allowing players to become free agents immediately upon entry into the major leagues?

5. A minimum wage will influence different labor markets differently. In four separate market diagrams, illustrate the following cases: (i) a competitive market in which causes a 50% reduction in labor demand; (ii) a competitive market in which the minimum wage does not causes a % reduction in labor demand; (iii) a monopsony market where the minimum wage increases employment; (iv) a monopsony market where the minimum wage decreases employment. (Hint under the monopsony model of minimum wages, the effective marginal expenditure curve has a horizontal range at the level of the minimum wage and then jumps to rejoin the original marginal expenditure curve.)

carmineturtle227

1. To maximize profits, a firm should produce output up to the point where

A. marginal revenue equals marginal cost

B. price equals marginal cost

C. the gap between the demand curve and the ATC is the greatest

D. all of the above

E. answers a and b, but not c

2. Which statement is false?

A. a profit maximizing firm will increase production when price exceeds marginal cost

B. the lowest point on a firm's short-run supply curve is at the shut-down point

C. A firm will operate at that ouput where MC equals MR only when it is maximizing profits

D. A profit-maximizing firm will decrease production when marginal cost exceeds price.

3. which statement is true?

A. all monopolies are good

B. All monopolies are bad

C. Most natural monopolies are government regulated or government owned

D. None of these statements is true

4. There are _____ limits to monopoly power

A. no

B. some

C. many

5. Which statement is true?

A. the monopolist's most efficient output is her most profitable output as well

B. the monopolist charges a higher price than the perfect competitor in the long run.

C. all monopolists have control over an essential resource.

D. none is true

6. As a firm grows larger

A. economies of scale set in, then diseconomies of scale.

B. diseconomies of scale set in, then economies of scale.

C. economies of scale and diseconomies of scale set in at the same time.

D. neither economies of scale nor diseconomies of scale set in.

7. A monopolist operates at the minimum point of her ATC curve

A. only in the short run

B. only in the long run

C. in both the short run and the long run

D. in neither the short run nor the long run

8. A natural monopoly

A. has an average cost curve that reaches minimum possible average cost at a low level of output.

B. has a marginal cost curve that is steeply upward slopoing.

C. is usually subject to antitrust suits

D is usually allowed to choose its price so as to maximize profits in the United States.

E. occurs when a single firm can supply the entire market demand for a product at a lower average cost than would be possible if two or more firms supplied the market.

9. For a monopolist, the price of the product

A. always equals the marginal revenue

B. is always less than the marginal revenue

C. exceeds the marginal revenue

D. always equals the marginal cost of the product

10. Monopolies are usually viewed with concern from an economic standpoint since

A. size is ingerently dangerous; the larger ther firm, the more likely it is to squeeze out the "little producer"

B. resources may be allocated in an efficient manner.

C. the government may be put at the mercy of several large producers

D. always equals the marginal cost of the product

Economics 2152A/B Study Guide - Midterm Guide: Private Good, Public Good, Marginal Cost

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