1 g406, regulation, eric rasmusen, [email protected] april 26, 2012 review
TRANSCRIPT
Graphing the Market2
Only Quantity Matters
Whatever price is chosen under this two-part regulation, the totalsurplus will stay the same. When the quantity is fixed, the price is justa transfer from buyer to seller. The total surplus is
( Gross Buyer Beneƒit -Price∗Quantity) + ( Price∗Quantity - Seller Cost) .
The Price ∗ Quantity terms cancel each other, so the total surplusis (Gross Buyer Benefit - Seller Cost), which does not depend on theprice.
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The Marginalism Argument
The total surplus does depend on the quantity, however, which wewere keeping fixed at 200,000 bottles.
To see why this quantity maximizes surplus, consider increasing it.We will need the most reluctant seller to become active, one whosevalue for a bottle is $10.00 and who has already sold some but not allof his 100 bottles, since sellers with lower values are already selling.We will need a new buyer to become active too, one whose value isless than $10.00, since buyers with higher values are already buying.Even if the new seller’s value is $10.00 and the new buyer’s value is$9.99, this new exchange reduces total surplus by $.01 rather thanincreasing it. Increasing sales further would reduce total surplus byeven more.
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A Price Ceiling (rent control)5
6Monopoly Allocative Inefficiency
Value Curves
lk;If consumers have
good information, then their maximum willing-ness to pay is also their true value of the product.
Their demand curve— their maximum willingness to pay— is the same as their value curve— the value they receive from the product oncethey consume it, given their personal tastes and the other things theyare consuming.
Externalities
lk;
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A Pollution Tax
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Real versus Pecuniary Externalities
The shattered whisky bottle, the water pollution, and the tree in the yard create real externalities: spillovers such that someone’s action affects the utility of someone else directly rather than through prices.
If the spillover results from prices changing, it is called a pecuniary externality.
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The Barber’s Guild 11
A Price Floor
lk;
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Three Categories of Public Servants
Elected officials such as the United States President.
Bureaucrats who are appointed by the elected officials and who can be fired by them, e.g., the Secretary of the Treasury.
Bureaucrats who spend most of their careers in government service (e.g., FBI agents)
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Three Types of Officials
1. Careerist. Their loyalty is to the agency.
2. Politician. Their loyalty is to whoever can promote them.
3. Professional. Their loyalty is to their profession.
All three would like to do a good job, but for different reasons. All three can be either political appointees or civil servants.
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The Three-Part Test for Regulation
1. Is there market failure?
2. Is there a regulation that would solve the market failure better?
3. Would there be government failure if we tried to pass the regulation?
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Making Regulations: Administrative Law
A regulation is like a law, but Congress doesn’t have to approve it.
Every regulation is supposed to be a mere implementation of a Congressionally-passed law.
If Congress passes a law that says dangerous substances must be kept to safe levels in the workplace, the executive branch must decide how much to limit benzene, if at all.
This gives a lot of power to the President.
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The Chevron Doctrine
If a regulation has gone through the formal process and someone questions in court whether the regulation is a correct application of the statutes, the courts give the benefit of the doubt to the regulation.
This is known as administrative deference, or the Chevron Doctrine .
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The Two-Part Test ``If the intent of Congress is clear, that is the end of the matter; for the court as well as the agency must give effect to the unambiguously expressed intent of Congress.
If the Court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction of the statute . . . rather,…
If the statute is silent or ambiguous with respect to the specific question, the issue for the court is whether the agency's answer is based on a permissable construction of the statute.''
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The Home Concrete Case What should be the statute of limitations for reporting too low a number for your capital gains profit?– Three years, like most things; or six years, like “omissions from income” Since the 1950’s everybody has thought that if you include but misreport your capital gains, the limit is 3. Recently, the IRS has claimed 6. The IRS lost 13-0 in Tax Court.
Then it passed a new regulation saying it’s 6 years.Then on appeal, it pointed to the new regulation
and claimed Chevron deference. The Supreme Court heard oral argument Jan.2012.
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Present discounted value 20
The present discounted value or present value of X dollars received t years from today is, if the discount rate is constant at r: The value of of X dollars received t years from today is, if the discount rate varies each year: The present value of X dollars at the end of each year forever, the bond known as a perpetuity or a consol is :
The Time t to Double Your Initial Investment X
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Two Methods
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1. The Forensic Approach Look at the value of earnings and services that could
be bought for dollar amounts, e.g. a man has 10 years of working life left, he earns $50,000/year, and interest rates are zero, so his life is worth $500,000.
2. The Statistical Life Approach Look at how much people accept to bear small risks of
death and scale that up, e.g. We would each pay $20 to avoid a 1/1000 chance of death this year, so as a group, 1000 of us would pay $20,000 to avoid the certainty of one of us dying this year.
Hedonic Regression24
Supply and Demand—Tax Example
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Setting the Minimum Wage29
What is the supplycurve for workers’ labor?
Setting the Minimum Wage30
The Minimum Wage and Recession
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The Workers’ Ideal if Qd=18-L32
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Health Insurance as an Efficient Fringe Benefit
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by workers
by employers
Inefficient Fringe Benefits35
by employers
by workers
Unperceived Workplace Danger36
Job Danger: Downward Sloping Demand
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Bank Runs
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LEVERAGE RAISES PROFITS: Riskless Arbitrage
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Risky Arbitrage (corrected for bankruptcy)
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Return: .8(610%) + .2 (-100%) = 488%- 20%= 468%.
Tranches: Creating Safe Assets Out Of Risky Ones
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Pollution Externality and Licenses
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Licensing vs. Regulation43
A Pollution Tax44
A Pollution Tax with Rising Supply
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Optimal Pollution46
Two Firms and Cap and Trade47
A Coase Theorem Example
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A paper mill is polluting a river. The farmer downstreamhad been selling trout fishing rights to rich tourists for$20,000.Now the trout have fled, and he gets zero.
The factory could install filtering machinery that wouldeliminate the pollution, at a cost of $4,000.
1. Suppose the farmer has the right to a clean river.2. Suppose the factory has the right to dump its wastewater into the river.
First Problem: The Common Pool Resource Game
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Shifts in Supply as the Resource Runs Out
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The Price of a Nonrenewable Resource over Time
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Pollution Externality and Licenses
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Licensing vs. Regulation53
A Pollution Tax54
A Pollution Tax with Rising Supply
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Optimal Pollution56
Two Firms and Cap and Trade57