Transcript 14review - Eric Rasmusen

G406, Regulation,
Eric Rasmusen,
[email protected]
April 26, 2012
REVIEW
1
Graphing the Market
2
Only Quantity Matters
Whatever price is chosen under this two-part regulation, the total
surplus will stay the same. When the quantity is fixed, the price is just
a 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 surplus
is (Gross Buyer Benefit - Seller Cost), which does not depend on the
price.
3
The Marginalism Argument
The total surplus does depend on the quantity, however, which we
were 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 whose
value for a bottle is $10.00 and who has already sold some but not all
of his 100 bottles, since sellers with lower values are already selling.
We will need a new buyer to become active too, one whose value is
less 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 than
increasing it. Increasing sales further would reduce total surplus by
even more.
4
A Price Ceiling (rent control)
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Monopoly Allocative Inefficiency
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Value Curves
lk;
If consumers have
good information, then their
maximum willingness 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 once
they consume it, given their
personal tastes and the
other things they
are consuming.
Externalities
lk;
8
A Pollution Tax
9
Real versus Pecuniary
Externalities
10
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.
The Barber’s Guild
11
A Price Floor
lk;
12
Three Categories of Public
Servants
13
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.
The Three-Part Test for Regulation
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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?
Making Regulations:
Administrative Law
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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.
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
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``If the intent of Congress is clear, that is the end of the matter
or the court as well as the agency must give effect to the
nambiguously expressed intent of Congress.
If the Court determines Congress has not directly
ddressed 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
pecific question, the issue for the court is whether the agency's
nswer is based on a permissable construction of the statute.''
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
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 :
20
21
The Time t to Double Your Initial Investment
X
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Two Methods
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.
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Hedonic Regression
Supply and Demand—Tax
Example
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Setting the Minimum Wage
What is the supply
curve for workers’
labor?
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Setting the Minimum Wage
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The Minimum Wage and
Recession
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The Workers’ Ideal if Qd=18-L
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Health Insurance as an Efficient
Fringe Benefit
by workers
by employers
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Inefficient Fringe Benefits
by workers
by employers
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Unperceived Workplace Danger
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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)
Return: .8(610%) + .2 (-100%) = 488%- 20%= 468%.
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Tranches: Creating Safe Assets
Out Of Risky Ones
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Pollution Externality and Licenses
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Licensing vs. Regulation
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A Pollution Tax
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A Pollution Tax with Rising Supply
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Optimal Pollution
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Two Firms and Cap and Trade
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A Coase Theorem Example
A paper mill is polluting a river. The farmer downstream
had 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 would
eliminate 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 waste
water into the river.
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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
52
Licensing vs. Regulation
53
A Pollution Tax
54
A Pollution Tax with Rising Supply
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Optimal Pollution
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Two Firms and Cap and Trade
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