ECO 481:Public Choice Theory

Week 7: Week 7: Producer Rigged Producer Rigged

MarketsMarkets& Consumer Protection& Consumer Protection

Dr. Dennis Foster

Pt. I: Producer-Rigged Markets

• We benefit from competition.• Firms don’t like to compete!!• Cartels - benefit firms at expense of consumers.

• Welfare loss.• Transfer• Rent seeking = loss

• Free riders - coffee.

Producer-Rigged Producer-Rigged MarketsMarkets

• The government as enforcer.• Thousands of trade associations/lobbyists.

““[T]hey do not visit monuments or museums. [T]hey do not visit monuments or museums. They are rent seekers and protectors. They They are rent seekers and protectors. They have become so because simple majority rule have become so because simple majority rule enables and encourages exploitation. From enables and encourages exploitation. From this rule stems log rolling and thence a transfer this rule stems log rolling and thence a transfer societysociety in which short-run gains prevail in which short-run gains prevail over long-run general losses.” over long-run general losses.”

The Costs of ProtectionThe Costs of Protection Tariffs - deadweight loss . . .Tariffs - deadweight loss . . .• Steel:–Bush: 30% tariffs.–Unions get higher wages.–Will they become competitive?– Est. $1 million per job saved.– 1980s & autos.

• Farm policy:– price controls, acreage restrictions.– transfers to 1% of pop.

Limits to ProtectionLimits to Protection • Opposing forces:– Protect steel - raise costs to autos.

• Additional issues - use less steel and more plastic.

– Exporters and their unions.

Some conclusions:1. The more sellersmore sellers, the harder it is to form a

cartel.2. The more non-homogeneousmore non-homogeneous the product,

the harder it is to form a cartel.3. The more excess capacitymore excess capacity, the harder it is to

form a cartel.

AgoraphobiaAgoraphobia • There is no “personal” benefit to under-

standing how markets work.

• We tend to believe they are zero-sum games.

• Implies - cutthroat competition, seller ad in,monopolies and immoral profits.

• And, producers don’t want competition!

• SR gains outweigh LR costs.

• Friedman on business

Pt. II: Consumer Pt. II: Consumer ProtectionProtection

MonopolyMonopoly • In non-regulated markets, they fade.

• They can only persist with government aid.

• Still, they do face a demand.

• Cartels organized/regulated by the gov’t.--price, quality, quantity, entry

• Cross subsidies common.

• Transfer can be a welfare loss.

• How did we deregulate trucking/airlines?How did we deregulate trucking/airlines?

Monopoly - GraphicallyMonopoly - Graphically

Quantity

Price

MC-m

MC-c

Demand

Q-m Q-c

transfer loss

Lack of competition in the public sector leads to Lack of competition in the public sector leads to social loss.social loss.

What to do?What to do?

• Just learn to live with it!

•Buy off favored firms.

•Auction off monopoly rights.

•Slowly dissolve monopoly rents (?)

•Regulate.

•Decrease government intervention.

A market for safety?A market for safety? • Of course! Volvos vs. Yugos.

• Choices are rational.

• Market caters to many preferences.

• Government caters to one.

• Airbags - costly in $ and lives!

• “We find it odd indeed that consumers of private goods are assumed by Naderites to be incapable of assessing their own risks but highly capable of voting for public officials who can assess those risks for others.”

S

SafetyQ* Q-max

$

D-ra

D-rt

CasesCases • CAFE standardsCAFE standards• Goal: fuel use through better mpg.• Result: Smaller, lighter vehicles.• Consequence: deaths (2000/yr.)!!!

• AlcoholAlcohol• Oregon - state control of price, place,

entry.• Conflicting goals - consumption &

revenue.• Encourages substitution, illegal activity.

• Gov’t as real monopoly (schools, roads, Gov’t as real monopoly (schools, roads, etc.)etc.)

ECO 481:Public Choice Theory

Week 7: Week 7: Producer Rigged Producer Rigged

MarketsMarkets& Consumer Protection& Consumer Protection

Dr. Dennis Foster