ECO 481:Public Choice Theory

Week 6 – Part I:Week 6 – Part I:In Praise of MarketsIn Praise of Markets

Dr. Dennis Foster

Simple ObservationsSimple Observations

• Economic benefits to Capitalism irrefutable.

• Gov’t. cannot replicate the level of information that prices convey to economic actors.

• Free markets are better at coordination.• Since 1930s, we’ve seen the substitution

of the political process for the market process.

• More recently - interest in privatization.

The Nature of the The Nature of the MarketMarket

• Hayek - redefining competition.• Disequilibrium process.• “Capitalism produces a kind of partially

ordered chaos . . . Everything is in transition and doubt: knowledge, opportunities, and above all, expectations.”

• Imperfect characteristics?No, dynamic!

Monopoly ReconsideredMonopoly Reconsidered

• Unlikely to last even in the extreme.--Railroads can’t control trucking!--Only the government can perpetuate.

• Most dramatic case is the “government mandated labor union.”

• The gov’t. as a “cartel manager.”--quotas, licenses, allotments.--consider milk pricing . . .

Dairy Price SupportsDairy Price SupportsBasic Formula Price (BFP)

= last month's average price paid for manufacturing = last month's average price paid for manufacturing grade milk in Minnesota and Wisconsingrade milk in Minnesota and Wisconsin+ [current grade AA butter price X 4.27 + current non-dry + [current grade AA butter price X 4.27 + current non-dry milk price X 8.07 - current dry-buttermilk price X 0.42]milk price X 8.07 - current dry-buttermilk price X 0.42] + [current cheddar cheese price X 9.87 + current grade A + [current cheddar cheese price X 9.87 + current grade A butter price X 0.238] butter price X 0.238] - [last month's grade A butter price X 4.27 + last month's - [last month's grade A butter price X 4.27 + last month's nondry-milk price X 8.07 + last month's dry-buttermilk nondry-milk price X 8.07 + last month's dry-buttermilk price X 0.42] price X 0.42] - [last month's cheddar cheese price X 9.87 + last month's - [last month's cheddar cheese price X 9.87 + last month's grade A butter price X 0.238] grade A butter price X 0.238] + (present butter fat - 3.5) X [current month's butter price + (present butter fat - 3.5) X [current month's butter price X 1.38] X 1.38] - [last month's price of manufacturing grade milk in - [last month's price of manufacturing grade milk in Minnesota-Wisconsin X 0.028].Minnesota-Wisconsin X 0.028].

Rethinking the firmRethinking the firm • An empty box?• Coase - Why? Answer - Costs!• Price takers & price searchers.

“Life on the supply side is never dull.”• Growth/concentration is not some plot.

--Ford to GM to Toyota--Woolworth’s to Kmart to Wal-Mart

• Advertising is imperative!What would a Socialist do?

The Virtues of the The Virtues of the MarketMarket

• Trial and error achieves rational outcome.• Even imperfect markets are remarkably

efficient.• Markets penalize incompetence &

miscalculation.• Markets reward ability & foresight.• Markets encourage innovation. Can the

government plan the “discovery” process?

ECO 481:Public Choice Theory

Week 6 – Part I:Week 6 – Part I:In Praise of MarketsIn Praise of Markets

Dr. Dennis Foster