(supposedly) unstable markets, market outcomes we don’t like & why we need or don’t need to...
TRANSCRIPT
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(SUPPOSEDLY) UNSTABLE MARKETS, MARKET OUTCOMES WE DON’T LIKE & WHY WE NEED
OR DON’T NEED TO REGULATE MARKETS.
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TWO BASIC IDEAS IN ECONOMICS
• THE “BROKEN WINDOW” FALLACY• “THE LAW OF UNINTENDED CONSEQUENCES”
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THE “BROKEN WINDOW” FALLACY
• THE “SEEN” IMPACTS AND THE “UNSEEN” IMPACTS OF BROKEN WINDOWS, DISASTERS, SUBSIDIES, ETC. (SEE The Broken Window)
• EVERYONE SEES THE “SEEN” IMPACTS, ECONOMISTS ALSO SEE THE “UNSEEN” IMPACTS
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THE LAW OF UNINTENDED CONSEQUENCES
• EVERY ATTEMPT TO ALTER MARKET OUTCOMES HAS UNINTENDED CONSEQUENCES
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AGRICULTURAL MARKETS
• COBWEB THEOREMS – UNSTABLE MARKETS• A CASE OF UNREASONABLE EXPECTATIONS• PRICE SUPPORTS (FLOORS) >> “PARITY (1907)
PRICING” >> SURPLUSES >> ATTEMPTS TO CURB OUTPUT
• “ACREAGE ALLOTTMENTS” AND PAYING FARMERS NOT TO FARM
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People in India, Africa, etc., Starve while US Grain Surpluses Rot
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WHY NOT EXPORT SURPLUSES?
• EXPORT SUBSIDIES – WHY? – FEED STARVING PEOPLE– BUT POOR INDIAN AND AFRICAN FARMERS DON’T
WANT THE US DUMPING GRAIN IN THEIR MARKETS AND DRIVING DOWN THEIR PRICES
• TO SAVE THE “FAMILY FARM”?• THE “FAMILY FARM” IS A MYTH – YES, THEY EXIST,
BUT THE VAST MAJORITY OF AG OUTPUT IN THE US COMES FROM LARGE CORPORATE AGRIBUSINESSES – AND THEY ALSO GET THE SUBSIDIES.
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MINIMUM WAGE LAWS
• UC-IRVINE ECONOMIST STUDIED OVER 100 STUDIES OF THE IMPACTS OF MINIMUM WAGE LAWS – 85% CONCLUDED THAT MINIMUM WAGES INCREASE UNEMPLOYMENT.
• CONSIDER THE DEMAND FOR LABOR, WHO WILL BE AFFECTED?
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Minimum Wage Laws Reduce the Gains from TradeAnd INCREASE UNEMPLOYMENT
Quantity
Wage
Supply
Demand forLabor
Qmarket
Market Wage
Qdemanded Qsupplied
MinimumWage
Unemployment
Lost Gains from Trade= Lost Employer Surplus+ Lost Worker Surplus
Lost Employer Surplus
Lost Worker Surplus
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MINIMUM WAGE LAWS
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PRICE CEILINGS• PRICE CEILINGS LEAD TO SHORTAGES RATIONING• NON-PRICE ALLOCATION SYSTEMS– BRIBERY– QUEING (STANDING IN LINES, WAITING LISTS, ETC.– HIGHER SEARCH AND TRANSACTIONS COSTS – WASTE– DISINCENTIVE INVESTMENTS TO EXPAND PRODUCTION
• RENT CONTROLS – NEW YORK, SANTA BARBARA, BERKELEY, ONTARIO, ETC.– SUB-LEASING, – “KEY CHARGES”, ETC.
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Rent Controls Misallocate Investment Resources
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WATER WARS• PRICING WATER – THE “MINER’S INCH” – FLAT
FEE FOR AS MUCH WATER AS YOU WANT – COMMON PRACTICE IN MANY WESTERN CITIES– IF THE MARGINAL COST OF WATER IS ZERO,
CONSUMERS USE WATER UP TO THE POINT WHERE THE MARGINAL VALUE IS ZERO – IN OTHER WORDS, THEY WASTE IT.
• BUT PRICING WATER IS CONSIDERED “UNFAIR”, SO WE GET RATIONING – “ODD” AND “EVEN” WATERING DAYS
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OTHER EXAMPLES
• THE 2001 CALIFORNIA ELECTRICITY CRISIS– A CEILING PRICE ON ELECTRICITY LED TO
“ROLLING BLACKOUTS”– TO DEAL WITH SHORTAGES, UTILITIES JUST SHUT
OFF POWER TO DIFFERENT SERVICE DISTRICTS ON A ROLLING BASIS
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THE MORAL OF THESE STORIES:
• TO ANSWER THE “WHO PRODUCES WHAT, FOR WHOM AND HOW” QUESTION THERE HAS TO BE A WAY TO ALLOCATE SCARCE RESOURCES.
• MARKETS CAN ALLOCATE SCARE RESOUCES EFFICIENTLY MOST OF THE TIME.
• SOMETIMES WE DON’T LIKE THE RESULTS OF MARKET ALLOCATIONS (BECAUSE OF PERCEPTIONS OF “FAIRNESS” OR IDEOLOGY) SO POLITICIANS TRY TO “RIG” THE MARKET TO GET “BETTER” OUTCOMES.
• OFTEN, THIS MAKES THE “PROBLEM” WORSE• BEWARE OF THE “LAW OF UNINTENDED CONSEQUENCES”