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ECO105 TEST 3 REVIEW.docx

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Department
Economics
Course
ECO105Y1
Professor
Avi Cohen
Semester
Fall

Description
ECO105 TEST 3 REVIEW Chapter 9: Monopoly Rules, Governments Regulation, Competition and the Law -Crown Corporations also occur in industries deemed to be publicly important for political or social reasons Ex: alcohol control, lotteries -each player in the Prisoner’s dilemma is only better off confessing if he/she cannot trust the other player -OPEC is not an illegal agreement because there is no international law on cartels that cross national borders -Competition Tribunals will prevent a merger if the costs of decreased competition exceed the benefits of increased efficiencies -penalties for criminal offences include prison sentences, for civil offences penalties are limited to fines and legal prohibitions -the discipline of market competition ensures that eventually consumers will stop buying products from businesses that produce harmful products -the additional benefits from regulation of industries like atomic energy and medicine exceed the costs -prices in the airline and trucking industries fell after deregulation -supports capture view -regulated industries were operating like a cartel, restricting output and raising prices -higher profits in regulated industries would support the capture view of government regulation -crown corporations exist in the electricity, water and gas industries -natural monopoly is likely to have high fixed costs and low marginal costs -challenge facing gov’t policy makers is how to gain the low-cost efficiencies of economies of scale while avoiding the inefficiencies of monopoly’s restricted output and rise in price -in the Prisoner’s dilemma each player would be better off if they could just trust each other and both deny -criminal offences in the Competition Act include price fixing, bid rigging and false advertising - the CRTC is an example of regulation through government-appointed agencies -Government failure -regulation fails to serve public interest, instead benefits industry being regulated -can be worse than market failure because the regulators act on behalf of the regulated industry instead of consumers -in business size matters because the efficient number of businesses in an industry depends on whether there are economies of scale -competition causes problems here and can only produce a lower output -government is between rock and hard place -if they allow market solution the bigger firms will eventually put smaller firms out of business -not in best interest of consumers and the economy as whole -it is efficient to have one large business supplying the entire market when it results in lower average costs for businesses and lower prices for consumers -by implicitly agreeing to keep prices high, gas stations can get more from consumers without the fear of losing their consumers to a nearby gas station -collusion hurts consumer because prices are kept high by businesses who have agreed upon keeping them high -collusion rarely lasts because there is an incentive to cheat if the players cannot trust one another to continue cooperating -if businesses cannot trust one another they end up cheating on the collusive agreement, which gives lower profits than the outcome where they trust one another -if prices rise after an industry is deregulated this supports the public interest view of gov’t regulation -gov’t actions resulted in market outcomes favourable to the public (lower prices) -suppliers would not need to invest in cost-saving innovations because consumers would be required to pay higher prices when costs increase -profit motive comes into play here -if prices in a regulated industry were allowed to rise then firms would make higher profits which would attract new firms and make the industry more competitive -reason for maintaining a natural monopoly in the TV industry is… -fixed costs are high, so if there were competition every new company would have to lay its own network of cables which would result in high average total costs and higher price for consumers -to achieve lowest average total cost, the technology of production allows only single seller -if an industry does not allow for a natural monopoly then privatization would result in lower prices as competitors try to attract customers -if prices and profits are higher under gov’t regulation then this supports the capture view of gov’t regulation -if prices for a product/service are capped by gov’t below a business’ marginal cost then the business will not produce that product/service because the additional costs exceed additional benefits -if the postal service was deregulated, Canadians in rural communities would pay higher costs for their mail to cover the higher costs for delivery Chapter 10: Acid Rain on Others’ Parade; Externalities, Carbon Taxes, Free Riders and Public Goods -with negative externalities must choose the output where Marginal Social Benefit= Marginal Social Cost -drivers impose a negative externality on non-drivers in the form of more pollution -markets overproduce products/services with negative externalities and under produce those with positive externalities -the ideal amount of pollution is not 0 because this would mean eliminating all cars and airplanes as well as all other forms of energy except solar and hydroelectric -it becomes increasingly difficult and costly to reduce pollution levels -Marginal Social Cost= Marginal Private Cost only if there are no negative externalities -with Carbon taxes the gov’t sets the price a business must pay for pollution, with a Cap-and- Trade system the gov’t sets the quantity -smart taxes lead individuals and businesses to choose outcomes that are best for society as a whole, where MSB= MSC Public goods-provide external benefits consumed by everyone simultaneously Ex: lighthouses, national defence -not profitable for businesses to provide these type of goods -these are free and under-produced products -college education is not a public provision because it is not directly financed with tax revenue collected by the gov’t -gov’t only provides subsidies -an example would be the public school education system -if there is a negative externality (and no positive externality) then marginal private cost is less than marginal social cost and marginal private benefit equals marginal social benefit -if there is both a positive & negative externality then marginal private cost is less than marginal social cost, and marginal private benefit is less than marginal social benefit -both the MSB & MSC columns will be more because the externality has been internalized -carbon taxes are inequitable if lower-income consumers are affected more than higher-income consumers -the free-rider problem occurs when there are positive externalities -smart subsidies for public goods equal the amount of the marginal external benefit -MSB= marginal private benefit + marginal external benefit -the amount of money that it takes to internalize the externality -introducing a carbon tax on fossil fuels would raise the price of carbon because this added tax must now be factored into price -in order to reduce gas consumption (in response to carbon tax) consumers can carpool, sell their cars and take public transit, re-insulate their homes (to save on heating costs), buy new types of furnaces -a graduated tax allows people time to adjust to the price increase -more time to find cheaper alternatives -some goods and services that would rise in price after tax are home-heating fuel and coal-fired electricity -people in colder climates of Canada would argue that a carbon tax is inequitable because they rely more on fossil fuels for heat, as well as people in rural areas who have less choices for ‘going green’ -carbon taxes have a bigger hit on the income of the poor so by redistributing some of the extra tax revenue collected by the carbon tax to the poor makes it more equitable -offsets increased portion of income spent to heat their home or put gas in their car -as the targeted emissions reduction increases it becomes increasingly difficult, and costly, to adjust due to higher carbon prices -not a smart choice now because the costs of reducing emissions far outweigh the benefits -in a Cap-and-Trade system the trading market sets the price for carbon emissions based on supply and demand of permits -permits are sold at auction -can be difficult to administer because thousands of companies would be involved in the buying and trading of permits and haggling over prices -with a cap-and-trade system the gov’t has control over quantity and prices adjust, with a carbon tax that gov’t has control over price and quantities adjust -the cap-and-trade model guarantees the chosen emissions reduction goal will be met because the gov’t would set an overall limit on the amount of carbon dioxide that can be pumped into the atmosphere -if demand for carbon is inelastic then a very large carbon tax would be needed to induce large decreases in emissions -over a long period of time these ‘long-run’ elasticities would get larger because people have more time to adjust to prices and find alternatives to carbon -economists might favour subsidies for producers of alternative fuels over regulation because as long as the amount of subsidy is set equal to the marginal external benefit, society will voluntarily choose where marginal social benefit= marginal social cost -if there is a positive externality involved a business will under-produce that product since they are not receiving money for that external benefit -gov’t can step in an provide a subsidy either to the business or the consumers who buy the good/service as a way to promote this beneficial product/service -a global carbon tax would be most preferred because it forces countries to fully internalize the externality -if there was an international agreement to impose a carbon tax, carbon emitters could simply move to countries where the tax is lower or to a country that does not tax carbon -gov’ts subsidize products/services with positive externalities so as to increase the production of something that would be otherwise be under-produced -driving is a negative externality because it leads to more pollution for everyone else as well as greater traffic congestion for other motorists -a subsidy for public transit would increase the cost of driving which would encourage less driving and more transit -revenues increase more when consumers don’t respond to higher prices by reducing their quantity demanded Gilbert Metcalf -argues for taxing emissions on producers of coal, natural gas and crude oil since there aren’t as many of them and it would make the program easier to administer -this would cause an increase in price for consumers since these products are now more expensive to produce Chapter11: Demand and Supply in Input Markets, and Income and Wealth Distributions -income is a flow (amount per unit of time), a stock is a fixed amount at a moment in time -businesses’ demand is derived from the output market -businesses’ interest in profits from selling output -$1 today is much more valuable than $1 tomorrow because it can be invested and earning interest today -if interest rates increase you have to further discount future revenues to adjust for more forgone interest -when interest rates decrease, present value increases so a smart choice before the decrease would be even more profitable -for most products/services high input prices cause high output prices -in some cases the price a business can get for an output determines how much they are willing to spend on inputs -superstar hockey salaries and ticket prices -owners know fans will pay big bucks to see superstar talent therefore owners will bid up contracts because they know they will recover those costs in ticket sales -in Canada wealth is more unequally distributed than income -poorest families only own about 2% of the country’s wealth -regressive taxes (tax rate decreases as income increases) takes more from the poor than it does from the wealthy -compared with the market distribution of income, gov’t transfers and taxes reduce the inequality of income distribution -income is what you earn, wealth is what you own -Economic Rent is income paid to any input in relatively inelastic supply -an investment choice is smart when the present value of the future stream of revenues is greater than the price of investment -the present value of a future amount of money is less than the future amount because future revenues are discounted to adjust forgone interest -a stock concept -rents are determined by demand -for inputs in inelastic supply -there is no supply response to higher prices -the price paid for the input is not proportional to its productivity -input prices are explained by output prices -in Canada the poorest 20% of families earn 2% of the total income -the bottom 24% of families have no wealth or negative wealth -the wealthiest 10% own 51% of the total wealth -the wealthiest 1% own 24% of the total wealth -a family of 3 in Toronto who makes less than $26 624 per year is considered to be in poverty -more than 600 000 families in Canada lived below the poverty line in 2006 -1 out of 10 children lived below poverty line in 2006 -diminishing marginal revenue product -each additional labourer has lower marginal product than previous labourer -fixed amount of supplies to use to make products/services so with each new worker the workplace becomes more crowded and therefore less productive n Present value= money available in n years/ (1+ interest rate) -in input markets, the households are the sellers and businesses are the buyers; output markets, businesses sell products/services to households who use the money they earned from wages in the input market -Paola pays her workers wages for doing nails and piercings -customers come to Paola to get piercings and nails done -derived demand -demand for output and profits businesses can derive from hiring labour -human capital -increased earning potential from on-the-job training, work experience and education -those with higher potential have a higher productivity to offer employers therefore they have higher incomes -The Robin Hood Principle -‘take from the rich and give to the poor’ -politicians will use this as justification for higher tax rates for the rich as it benefits those who are less fortunate -policy options to fix poverty and inequality -progressive tax -training programs -education -transfer system (redistributes money back into pockets of the poor after tax revenues have been collected) -Canada Child Tax Benefit, Canada Assistance Plan, Old Age Security, Employment Insurance -after taxes and transfers income is more equitable than it was before -when gov’ts take more of your income in taxes it reduces your incentives to spend money in the economy -if taxes cause some individuals to supply less to the market because the rewards aren’t as high, then input owners will earn less and output markets will produce fewer products/services -‘a more equally shared pie may be a smaller pie’ Conservative politician -might oppose progressive taxes and transfers because they believe efficiency of markets is most important for generating economic prosperity -markets are already equitable because they provide everyone will equal opportunities -believes every person’s accomplishments will differ based on differences in talent, initiative and luck -inequality and poverty a result of personal choices, failures or misfortunes NOT systematic market failures that require gov’t intervention -charity is more appropriate response to the poor Left-leaning politician -favour progressive taxes and transfers -equity is more important than efficiency -concerned with improving equality of incomes -does not believe poor children have the same opportunities as rich children -inherited wealth stacks the rules of the game for children born into wealth -being born into a poor family should not consign you to a life of poverty -takes issue with the market principle “what you are worth is what the market is willing to pay you for the inputs you provide” -poverty and inequality are a result of failure of a market system that gov’t is obligated to remedy Efficient market outcome -not necessarily fair or equitable -may include poor people unable to pay for the basic necessities like shelter, food and medical care Equitable Market outcome -leads to a more shared pie but a smaller one -people’s incomes are reduced with taxes therefore less incentive to spend in the market which affects businesses’ choice to supply products/services -high income taxes on the rich allow gov’t to redistribute income more equitably but this may cause some individuals to supply less to the market because rewards aren’t as high, this means workers earn less and output markets will produce fewer products/service -providing additional income to families who work (rather than giving assistance to those who don’t which increases the incentive not to work) increases the income of poor families while at the same time increasing the incentive to work and output -federal and provincial gov’ts have adopted the Robin Hood principle in that the take more tax from the rich and redistribute it to lower income families through transfer payments Macro. Chapter 1: Reconciling Macro and Micro-Is the whole Greater than the Sum of its Parts -if GDP per person is declining in a country then this means their standard of living is decreasing -if fewer products/services are available per person for people to enjoy then this means their standard of living is declining -even if a country is not using monetary policy as a way to get out of a recession the central bank can still supervise the banking system and financial markets -high level of unemployment means employers have a large pool of job applicants to choose from giving them the upper hand -when investing in a country or
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