Bài giảng Managerial Economics - Chapter 016: Government Regulation of Business

Chapter 16: Government Regulation of Business McGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.Market Competition & Social Economic EfficiencySocial economic efficiencyExists when the goods & services that society desires are produced & consumed with no waste from inefficiencyTwo efficiency conditions must be metProductive efficiencyAllocative efficiencyProductive EfficiencyExists when suppliers produce goods & services at the lowest possible total cost to societyOccurs when firms operate along their expansion paths in both the short-run & long-runAllocative EfficiencyRequires businesses to supply optimal amounts of all goods & services demanded by societyAnd these units must be rationed to individuals who place the highest value on consuming themOptimal level of output is reached when the MB of another unit to consumers just equals the MC to society of producing another unitWhere P = MC (marginal-cost-pricing)Social Economic EfficiencyAchieved by markets in perfectly competitive equilibriumAt the intersection of demand & supply, conditions for productive & allocative efficiency are metAt the market-clearing price, buyers & sellers engage in voluntary exchange that maximizes social surplusEfficiency in Perfect Competition (Figure 16.1)Market Failure & the Case for Government InterventionCompetitive markets can achieve social economic efficiency without government regulationBut, not all markets are competitive, and even competitive markets can sometimes fail to achieve maximum social surplusMarket failureWhen a market fails to achieve social economic efficiency and, consequently, fails to maximize social surplus Market Failure & the Case for Government InterventionSix forms of market failure can undermine economic efficiency:Monopoly powerNatural monopolyNegative (& positive) externalitiesCommon property resourcesPublic goodsInformation problemsMarket Failure & the Case for Government InterventionAbsent market failure, no efficiency argument can be made for government intervention in competitive marketsMarket Power & Public PolicyFirms with market power must price above marginal cost to maximize profit (P > MC)These firms fail to achieve allocative efficiency, which reduces social surplusLost surplus is a deadweight lossAllocative efficiency is lost because the profit-maximizing price does not result in marginal-cost-pricingAt the profit-maximizing point, MB > MCResources are underallocated to the industryLouisiana White Shrimp Market (Figure 16.2)Market Power & Public PolicyWhen the degree of market power grows high enough, antitrust officials refer to it legally as monopoly powerNo clear legal threshold has been established to determine when market power becomes monopoly powerPromoting Competition Through Antitrust PolicyA high degree of market power (or monopoly power) can arise in three ways:Actual or attempted monopolizationPrice-fixing cartelsMergers among horizontal competitorsFirms may be found guilty of actual monopolization only if both of the following conditions are met:Behavior is judged to be undertaken for the sole purpose of creating monopoly powerFirm successfully achieves high degree of market powerFirms can also be guilty of attempted monopolizationPromoting Competition Through Antitrust PolicyNatural Monopoly & Market Failure Natural monopolyWhen a single firm can produce total consumer demand for a good or service at a lower long-run total cost than if two or more firms produce total industry outputLong-run costs are subadditiveSubadditive Costs & Natural Monopoly (Figure 16.3)Natural Monopoly & Market FailureBreaking up a natural monopoly is undesirableIncreasing number of firms drives up total cost & undermines productive efficiency Under natural monopoly, no single price can establish social economic efficiencyRegulating Price Under Natural Monopoly (Figure 16.4)Natural Monopoly & Market FailureWith economies of scale, marginal-cost-pricing results in a regulated natural monopoly earning negative economic profit Two-part pricing is a solution that can meet both efficiency conditions & maximize social surplusThe Problem of Negative ExternalityExternalitiesWhen actions taken by market participants create either benefits or costs that spill over to other members of society Positive externalities occur when spillover effects are beneficial to societyNegative externalities occur when spillover effects are costly to societyExternalities undermine allocative efficiencyMarket participants rationally choose to ignore the benefits & costs of their actions that spill over to othersCompetitive market prices do not capture social benefits or costs that spill over to societyThe Problem of Negative ExternalityManagers rationally ignore external costs when making profit-maximizing production decisions Social cost of production: Social cost = Private cost + External costor Social cost – Private cost = External costThe Problem of Negative ExternalityNegative Externality & Allocative Inefficiency (Figure 16.5)Pollution as a Negative Externality (Figure 16.6)Finding the Optimal Level of Pollution (Figure 16.7)Optimal Emission Taxation (Figure 16.8)NonexcludabilityTwo kinds of market failure caused by nonexcludability:Common property resourcesPublic goodsCommon Property ResourcesResources for which property rights are absent or poorly definedNo one can effectively be excluded from such resourcesWithout government intervention, these resources are generally overexploited & undersuppliedPublic GoodsA public good is nonexcludable & nondepletableThe inability to exclude nonpayers creates a free-rider problem for the private provision of public goodsEven when private firms supply public goods, a deadweight loss can be avoided only if the price of the good is zeroInformation & Market FailureMarket failure may also occur because consumers lack perfect knowledgePerfect knowledge includes knowledge about product prices, qualities, and any hazardsMarket power can emerge because of imperfectly informed consumersConsumers may over- or under-estimate quality of goods & servicesIf they over-value quality, they will demand too much product relative to the allocatively efficient amountIf they under-value quality, they will demand too littleInformation & Market FailureImperfect Information on Product Quality (Figure 16.9)