ECO 481: Public Choice Theory

1. ECO 481:Public Choice Theory Week 7: Producer Rigged Markets & Consumer Protection Dr. Dennis Foster

2. Pt. I: Producer-Rigged Markets • Welfare loss. • Transfer • Rent seeking = loss • Free riders - coffee. We benefit from competition. Firms don’t like to compete!! Cartels - benefit firms at expense of consumers.

3. Producer-Rigged Markets • The government as enforcer. • Thousands of trade associations/lobbyists. “[T]hey do not visit monuments or museums. They are rent seekers and protectors. They have become so because simple majority rule enables and encourages exploitation. From this rule stems log rolling and thence a transfer society in which short-run gains prevail over long-run general losses.”

4. The Costs of Protection 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.

5. Limits 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. Themore sellers, the harder it is to form a cartel. 2. Themore non-homogeneousthe product, the harder it is to form a cartel. 3. Themore excess capacity, the harder it is to form a cartel.

6. Agoraphobia Pt. II: Consumer Protection • 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

7. Monopoly • 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?

8. Monopoly - Graphically Price transfer loss MC-m MC-c Demand Quantity Q-m Q-c Lack of competition in the public sector leads to social loss.

9. 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.

10. A market for safety? $ S D-ra D-rt Safety Q* Q-max • 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.”

11. Cases • CAFE standards • Goal:  fuel use through better mpg. • Result: Smaller, lighter vehicles. • Consequence: deaths (2000/yr.)!!! • Alcohol • Oregon - state control of price, place, entry. • Conflicting goals - consumption & revenue. • Encourages substitution, illegal activity. • Gov’t as real monopoly (schools, roads, etc.)

12. ECO 481:Public Choice Theory Week 7: Producer Rigged Markets & Consumer Protection Dr. Dennis Foster