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ECO 481: Public Choice Theory

ECO 481: Public Choice Theory. Week 6 – Part I: In Praise of Markets. Dr. Dennis Foster. Simple Observations. Economic benefits to Capitalism irrefutable. Gov’t. cannot replicate the level of information that prices convey to economic actors. Free markets are better at coordination.

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ECO 481: Public Choice Theory

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  1. ECO 481:Public Choice Theory Week 6 – Part I:In Praise of Markets Dr. Dennis Foster

  2. Simple Observations • Economic benefits to Capitalism irrefutable. • Gov’t. cannot replicate the level of information that prices convey to economic actors. • Free markets are better at coordination. • Since 1930s, we’ve seen the substitution of the political process for the market process. • More recently - interest in privatization.

  3. The Nature of the Market • Hayek - redefining competition. • Disequilibrium process. • “Capitalism produces a kind of partially ordered chaos . . . Everything is in transition and doubt: knowledge, opportunities, and above all, expectations.” • Imperfect characteristics?No, dynamic!

  4. Monopoly Reconsidered • Unlikely to last even in the extreme.--Railroads can’t control trucking!--Only the government can perpetuate. • Most dramatic case is the “government mandated labor union.” • The gov’t. as a “cartel manager.”--quotas, licenses, allotments.--consider milk pricing . . .

  5. Dairy Price Supports Basic Formula Price (BFP) = last month's average price paid for manufacturing grade milk in Minnesota and Wisconsin + [current grade AA butter price X 4.27 + current non-dry milk price X 8.07 - current dry-buttermilk price X 0.42] + [current cheddar cheese price X 9.87 + current grade A butter price X 0.238] - [last month's grade A butter price X 4.27 + last month's nondry-milk price X 8.07 + last month's dry-buttermilk price X 0.42] - [last month's cheddar cheese price X 9.87 + last month's grade A butter price X 0.238] + (present butter fat - 3.5) X [current month's butter price X 1.38] - [last month's price of manufacturing grade milk in Minnesota-Wisconsin X 0.028].

  6. Rethinking the firm • An empty box? • Coase - Why? Answer - Costs! • Price takers & price searchers.“Life on the supply side is never dull.” • Growth/concentration is not some plot.--Ford to GM to Toyota--Woolworth’s to Kmart to Wal-Mart • Advertising is imperative!What would a Socialist do?

  7. The Virtues of the Market • Trial and error achieves rational outcome. • Even imperfect markets are remarkably efficient. • Markets penalize incompetence & miscalculation. • Markets reward ability & foresight. • Markets encourage innovation. Can the government plan the “discovery” process?

  8. ECO 481:Public Choice Theory Week 6 – Part I:In Praise of Markets Dr. Dennis Foster

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