3Chapter

• Economic regulations should promote efficiency and technical progress.

• Efficiency is concerned with optimizing the use of existing resources and technology (technology is given)

• Technical progress is conditional on the allocation of resources to develop new technologies (for producing old products more cheaply and for producing completely new products).

• Efficiency is static, technical progress is dynamic.

• Different types of market structures may impact efficiency and technical progress differently

• Consumers are perfectly informed about all goods, all of which are private.

• There are many buyers and sellers in the market

• Consumers maximize preferences given budget constraints, producers maximize profits given their production functions.

• All agents are price-takers, and externalities among agents are ruled out

• A competitive equilibrium is determined, that is a set of prices such that all markets clear, is then determined

• Competitive equilibrium = Pareto optimal

– equilibrium cannot be replaced by another one that would increase the welfare of consumers without harming others («Всякое изменение, которое не приносит убытков, а которое некоторым людям приносит пользу (по их собственной оценке), является улучшением»).

• Equilibrium is when Price = Marginal Cost in all markets

• The ideal competitive world would have no need for government intervention in the marketplace, except for policies affecting income distribution (public finance)

• All firms price-takers. There are no super-normal profits.

• However, in practice economic regulation is often concentrated on industries where the assumptions of perfect competition do not hold.

• That is, antitrust economics is concerned with the causes and consequences of firm’s abilities to set price above marginal cost

• The compensation principle – choose policy that yield the highest economic surplus.

• The change is “good” if the “winners” from any policy change can compensate the “losers”.

• Monopsony – where a single buyer drives down the price it pays and the quantity it buys.

• Oligopoly – the intermediate case between perfect competition and monopoly where a small number of firms operate in a market with some ability to raise prices and reduce industry output.

• Oligopsony – where small groups of buyers drive down price paid and quantity bought.

• X-inefficiency (Leibenstein, 1956) occurs when firms do not minimise the costs of producing their output.

• X-inefficiency occurs due to lack of competition or incentive to minimise costs within firms.

• Monopolies may be particularly prone to such inefficiency.

Thus a reason why deregulation might be favoured is because the static cost efficiency of monopoly is outweighed in the long run by rising X-inefficiency

• Inefficiency is created by competition among agents to become a monopolist.

• Rent-seeking behavior

  • Lobbying legislators (entry regulations or import quotas)

  • Bribing legislators of regulators

  • Excessive non-price competition (advertising campaigns)

• Welfare loss < monopoly profit

• Schumpeter argued that innovation comes about through new combinations made by an entrepreneur, resulting in

  • a new product,

  • a new process,

  • opening of new market,

  • new way of organizing the business

  • new sources of supply