#Celler-Kefauver Act | Explore Tumblr Posts and Blogs

mostlysignssomeportents · 1 year

Text

The antitrust Twilight Zone

Funeral homes were once dominated by local, family owned businesses. Today, odds are, your neighborhood funeral home is owned by Service Corporation International, which has bought hundreds of funeral homes (keeping the proprietor’s name over the door), jacking up prices and reaping vast profits.

Funeral homes are now one of America’s most predatory, vicious industries, and SCI uses the profits it gouges out of bereaved, reeling families to fuel more acquisitions — 121 more in 2021. SCI gets some economies of scale out of this consolidation, but that’s passed onto shareholders, not consumers. SCI charges 42% more than independent funeral homes.

https://pluralistic.net/2022/09/09/high-cost-of-dying/#memento-mori

SCI boasts about its pricing power to its investors, how it exploits people’s unwillingness to venture far from home to buy funeral services. If you buy all the funeral homes in a neighborhood, you have near-total control over the market. Despite these obvious problems, none of SCI’s acquisitions face any merger scrutiny, thanks to loopholes in antitrust law.

These loopholes have allowed the entire US productive economy to undergo mass consolidation, flying under regulatory radar. This affects industries as diverse as “hospital beds, magic mushrooms, youth addiction treatment centers, mobile home parks, nursing homes, physicians’ practices, local newspapers, or e-commerce sellers,” but it’s at its worst when it comes to services associated with trauma, where you don’t shop around.

Think of how Envision, a healthcare rollup, used the capital reserves of KKR, its private equity owner, to buy emergency rooms and ambulance services, elevating surprise billing to a grotesque art form. Their depravity knows no bounds: an unconscious, intubated woman with covid was needlessly flown 20 miles to another hospital, generating a $52k bill.

https://pluralistic.net/2022/03/14/unhealthy-finances/#steins-law

This is “the health equivalent of a carjacking,” and rollups spread surprise billing beyond emergency rooms to anesthesiologists, radiologists, family practice, dermatology and others. In the late 80s, 70% of MDs owned their practices. Today, 70% of docs work for a hospital or corporation.

How the actual fuck did this happen? Rollups take place in “antitrust’s Twilight Zone,” where a perfect storm of regulatory blindspots, demographic factors, macroeconomics, and remorseless cheating by the ultra-wealthy has laid waste to the American economy, torching much of the US’s productive capacity in an orgy of predatory, extractive, enshittifying mergers.

The processes that underpin this transformation aren’t actually very complicated, but they are closely interwoven and can be hard to wrap your head around. “The Roll-Up Economy: The Business of Consolidating Industries with Serial Acquisitions,” a new paper from The American Economic Liberties Project by Denise Hearn, Krista Brown, Taylor Sekhon and Erik Peinert does a superb job of breaking it down:

http://www.economicliberties.us/wp-content/uploads/2022/12/Serial-Acquisitions-Working-Paper-R4-2.pdf

The most obvious problem here is with the MergerScrutiny process, which is when competition regulators must be notified of proposed mergers and must give their approval before they can proceed. Under the Hart-Scott-Rodino Act (HSR) merger scrutiny kicks in for mergers when the purchase price is $101m or more. A company that builds up a monopoly by acquiring hundreds of small businesses need never face merger scrutiny.

The high merger scrutiny threshold means that only a very few mergers are regulated: in 2021, out of 21,994 mergers, only 4,130 (<20%) were reported to the FTC. 2020 saw 16,723 mergers, with only 1.637 (>10%) being reported to the FTC.

Serial acquirers claim that the massive profits they extract by buying up and merging hundreds of businesses are the result of “efficiency” but a closer look at their marketplace conduct shows that most of those profits come from market power. Where efficiences are realized, they benefit shareholders, and are not shared with customers, who face higher prices as competition dwindles.

The serial acquisition bonanza is bad news for supply chains, wages, the small business ecosystem, inequality, and competition itself. Wherever we find concentrated industires, we find these under-the-radar rollups: out of 616 Big Tech acquisitions from 2010 to 2019, 94 (15%) of them came in for merger scrutiny.

The report’s authors quote FTC Commissioner Rebecca Slaughter: “I think of serial acquisitions as a Pac-Man strategy. Each individual merger viewed independently may not seem to have significant impact. But the collective impact of hundreds of smaller acquisitions, can lead to a monopolistic behavior.”

It’s not just the FTC that recognizes the risks from rollups. Jonathan Kanter, the DoJ’s top antitrust enforcer has raised alarms about private equity strategies that are “designed to hollow out or roll-up an industry and essentially cash out. That business model is often very much at odds with the law and very much at odds with the competition we’re trying to protect.”

The DoJ’s interest is important. As with so many antitrust failures, the problem isn’t in the law, but in its enforcement. Section 7 of the Clayton Act prohibits serial acquisitions under its “incipient monopolization” standard. Acquisitions are banned “where the effect of such acquisition may be to substantially lessen competition between the corporation whose stock is so acquired and the corporation making the acquisition.” This incipiency standard was strengthened by the 1950 Celler-Kefauver Amendment.

The lawmakers who passed both acts were clear about their legislative intention — to block this kind of stealth monopoly formation. For decades, that’s how the law was enforced. For example, in 1966, the DoJ blocked Von’s from acquiring another grocer because the resulting merger would give Von’s 7.5% of the regional market. While Von’s is cited by pro-monopoly extremists as an example of how the old antitrust system was broken and petty, the DoJ’s logic was impeccable and sorely missed today: they were trying to prevent a rollup of the sort that plagues our modern economy.

As the Supremes wrote in 1963: “A fundamental purpose of [stronger incipiency standards was] to arrest the trend toward concentration, the tendency of monopoly, before the consumer’s alternatives disappeared through merger, and that purpose would be ill-served if the law stayed its hand until 10, or 20, or 30 [more firms were absorbed].”

But even though the incipiency standard remains on the books, its enforcement dwindled away to nothing, starting in the Reagan era, thanks to the Chicago School’s influence. The neoliberal economists of Chicago, led by the Nixonite criminal Robert Bork, counseled that most monopolies were “efficient” and the inefficient ones would self-correct when new businesses challenged them, and demanded a halt to antitrust enforcement.

In 1982, the DoJ’s merger guidelines were gutted, made toothless through the addition of a “safe harbor” rule. So long as a merger stayed below a certain threshold of market concentration, the DoJ promised not to look into it. In 2000, Clinton signed an amendment to the HSR Act that exempted transactions below $50m. In 2010, Obama’s DoJ expanded the safe harbor to exclude “[mergers that] are unlikely to have adverse competitive effects and ordinarily require no further analysis.”

These constitute a “blank check” for serial acquirers. Any investor who found a profitable strategy for serial acquisition could now operate with impunity, free from government interference, no matter how devastating these acquisitions were to the real economy.

Unfortunately for us, serial acquisitions are profitable. As an EY study put it: “the more acquisitive the company… the greater the value created…there is a strong pattern of shareholder value growth, correlating with frequent acquisitions.” Where does this value come from? “Efficiencies” are part of the story, but it’s a sideshow. The real action is in the power that consolidation gives over workers, suppliers and customers, as well as vast, irresistable gains from financial engineering.

In all, the authors identify five ways that rollups enrich investors:

I. low-risk expansion;

II. efficiencies of scale;

III. pricing power;

IV. buyer power;

V. valuation arbitrage.

The efficiency gains that rolled up firms enjoy often come at the expense of workers — these companies shed jobs and depress wages, and the savings aren’t passed on to customers, but rather returned to the business, which reinvests it in gobbling up more companies, firing more workers, and slashing survivors’ wages. Anything left over is passed on to the investors.

Consolidated sectors are hotbeds of fraud: take Heartland, which has rolled up small dental practices across America. Heartland promised dentists that it would free them from the drudgery of billing and administration but instead embarked on a campaign of phony Medicare billing, wage theft, and forcing unnecessary, painful procedures on children.

Heartland is no anomaly: dental rollups have actually killed children by subjecting them to multiple, unnecessary root-canals. These predatory businesses rely on Medicaid paying for these procedures, meaning that it’s only the poorest children who face these abuses:

https://pluralistic.net/2022/11/17/the-doctor-will-fleece-you-now/#pe-in-full-effect

A consolidated sector has lots of ways to rip off the public: they can “directly raise prices, bundle different products or services together, or attach new fees to existing products.” The epidemic of junk fees can be traced to consolidation.

Consolidators aren’t shy about this, either. The pitch-decks they send to investors and board members openly brag about “pricing power, gained through acquisitions and high switching costs, as a key strategy.”

Unsurprisingly, investors love consolidators. Not only can they gouge customers and cheat workers, but they also enjoy an incredible, obscure benefit in the form of “valuation arbitrage.”

When a business goes up for sale, its valuation (price) is calculated by multiplying its annual cashflow. For small businesses, the usual multiplier is 3–5x. For large businesses, it’s 10–20x or more. That means that the mere act of merging a small business with a large business can increase its valuation sevenfold or more!

Let’s break that down. A dental practice that grosses $1m/year is generally sold for $3–5m. But if Heartland buys the practice and merges it with its chain of baby-torturing, Medicaid-defrauding dental practices, the chain’s valuation goes up by $10–20m. That higher valuation means that Heartland can borrow more money at more favorable rates, and it means that when it flips the husks of these dental practices, it expects a 700% return.

This is why your local veterinarian has been enshittified. “A typical vet practice sells for 5–8x cashflow…American Veterinary Group [is] valued at as much as 21x cashflow…When a large consolidator buys a $1M cashflow clinic, it may cost them as little as $5M, while increasing the value of the consolidator by $21M. This has created a goldrush for veterinary consolidators.”

This free money for large consolidators means that even when there are better buyers — investors who want to maintain the quality and service the business offers — they can’t outbid the consolidators. The consolidators, expecting a 700% profit triggered by the mere act of changing the business’s ownership papers, can always afford to pay more than someone who merely wants to provide a good business at a fair price to their community.

To make this worse, an unprecedented number of small businesses are all up for sale at once. Half of US businesses are owned by Boomers who are ready to retire and exhausted by two major financial crises within a decade. 60% of Boomer-owned businesses — 2.9m businesses of 11 or so employees each, employing 32m people in all — are expected to sell in the coming decade.

If nothing changes, these businesses are likely to end up in the hands of consolidators. Since the Great Financial Crisis of 2008, private equity firms and other looters have been awash in free money, courtesy of the Federal Reserve and Congress, who chose to bail out irresponsible and deceptive lenders, not the borrowers they preyed upon.

A decade of zero interest rate policy (ZIRP) helped PE grow to “staggering” size. Over that period, America’s 2,000 private equity firms raised buyout warchests totaling $2t. Today, private equity owned companies outnumber publicly traded firms by more than two to one.

Private equity is patient zero in the serial acquisition epidemic. The list of private equity rollup plays includes “comedy clubs, ad agencies, water bottles, local newspapers, and healthcare providers like hospitals, ERs, and nursing homes.”

Meanwhile, ZIRP left the nation’s pension funds desperate for returns on their investments, and these funds handed $480b to the private equity sector. If you have a pension, your retirement is being funded by investments that are destroying your industry, raising your rent, and turning the nursing home you’re doomed to into a charnel house.

The good news is that enforcers like Kanter have called time on the longstanding, bipartisan failure to use antitrust laws to block consolidation. Kanter told the NY Bar Association: “We have an obligation to enforce the antitrust laws as written by Congress, and we will challenge any merger where the effect ‘may be substantially to lessen competition, or to tend to create a monopoly.’”

The FTC and the DOJ already have many tools they can use to end this epidemic.

They can revive the incipiency standard from Sec 7 of the Clayton Act, which bans mergers where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”

This allows regulators to “consider a broad range of price and non-price effects relevant to serial acquisitions, including the long-term business strategy of the acquirer, the current trend or prevalence of concentration or acquisitions in the industry, and the investment structure of the transactions”;

The FTC and DOJ can strengthen this by revising their merger guidelines to “incorporate a new section for industries or markets where there is a trend towards concentration.” They can get rid of Reagan’s 1982 safe harbor, and tear up the blank check for merger approval;

The FTC could institute a policy of immediately publishing merger filings, “the moment they are filed.”

Beyond this, the authors identify some key areas for legislative reform:

Exempt the FTC from the Paperwork Reduction Act (PRA) of 1995, which currently blocks the FTC from requesting documents from “10 or more people” when it investigates a merger;

Subject any company “making more than 6 acquisitions per year valued at $70 million total or more” to “extra scrutiny under revised merger guidelines, regardless of the total size of the firm or the individual acquisitions”;

Treat all the companies owned by a PE fund as having the same owner, rather than allowing the fiction that a holding company is the owner of a business;

Force businesses seeking merger approval to provide “any investment materials, such as Private Placement Memorandums, Management or Lender Presentations, or any documents prepared for the purposes of soliciting investment. Such documents often plainly describe the anticompetitive roll-up or consolidation strategy of the acquiring firm”;

Also force them to provide “loan documentation to understand the acquisition plans of a company and its financing strategy;”

When companies are found to have violated antitrust, ban them from acquiring any other company for 3–5 years, and/or force them to get FTC pre-approval for all future acquisitions;

Reinvigorate enforcement of rules requiring that some categories of business (especially healthcare) be owned by licensed professionals;

Lower the threshold for notification of mergers;

Add a new notification requirement based on the number of transactions;

Fed agencies should automatically share merger documents with state attorneys general;

Extend civil and criminal antitrust penalties to “investment bankers, attorneys, consultants who usher through anticompetitive mergers.”

103 notes · View notes

laynebaril1blog-blog · 6 years

Text

Assignment The Sherman and Clayton Acts

Click Link Below To Buy:

http://hwcampus.com/shop/assignment-sherman-clayton-acts/

[email protected]

1. The Sherman and Clayton Acts

The Clayton Act of 1914 classifies several business practices as illegal, including price discrimination and tying contracts, if they "substantially lessen competition or tend to create a monopoly."

The Clayton Act of 1914 is an example of which of the following?

Antitrust laws

Price regulations

2. The Clayton and Celler-Kefauver Acts

Which of the following activities are prohibited by the Clayton Act when they lead to less competition?

A buyer is forced to buy multiple products from a producer in order to get a desired product.

Each of these answers is correct.

A director from one business sits on the board of a competing firm.

A firm acquires a major percentage of the stocks of a competing firm.

3. The Herfindahl index

Suppose that three firms make up the entire wig manufacturing industry. One has a 40% market share, and the other two have a 30% market share each.

The Herfindahl index of this industry is _________ (a.10,000 b.6,000 c.3,400 d.4,000 e.3,000).

A new firm, Mane Attraction, enters the wig manufacturing industry and immediately captures a 15% share of the market. This would cause the Herfindahl index for the industry to ___________ (a.fall b.rise c.remain the same).

The largest possible value of the Herfindahl index is 10,000 because:

An industry with an index higher than 10,000 is automatically regulated by the Justice Department

An index of 10,000 corresponds to a monopoly firm with 100% market share

An index of 10,000 corresponds to 100 firms with a 1% market share each

4. 90-60-30, Herfindahl, and the FTC

Suppose that in the market for soft drinks, market share is divided among six companies in the following manner:

Firm

Market Share

Coca-Cola

90%

Pepsi-Cola

Cadbury

Cott

National Beverage

Royal Crown

Based on the Herfindahl index of the market for soft drinks, the FTC would __________ (a.challenge b.encourage c.not challenge) a merger between Cadbury and National Beverage.

5. Three types of mergers

Categorize each of the following examples as a horizontal, vertical, or conglomerate merger.

Horizontal

Vertical

Conglomerate

A retail coffee chain merges with a sports equipment manufacturer.

A newspaper publisher merges with a paper and pulp mill.

In 1999, two large oil companies merged to form a single company.

6. Network monopolies

A lock-in effect ___________ (a.increases b.decreases) the costs of switching from one network good to another network good.

How do network externalities help a monopoly retain its market power?

If there are strong network externalities associated with a good, other goods are poor substitutes for it.

By exploiting network externalities, a firm can become a natural monopoly.

Goods with network externalities are more likely to receive a government patent.

7. When fewer firms are better II

Secure Corp is a home security provider. In the long run, Secure Corp can provide home security for 20,000 homes each month at a total cost of $700,000, home security for 30,000 homes at a total cost of $900,000, or home security for 40,000 homes at a total cost of $1,000,000.

Use the purple points (diamond symbol) on this graph to plot points of the long-run average cost curve at outputs of 20,000, 30,000, and 40,000 homes.

Suppose that there are 40,000 households that purchase home security in this area. All of Secure Corp's potential rivals face the same long-run average cost curve.

True or False: Because Secure Corp faces falling long-run average cost over the relevant output range, it would be inefficient for another firm to enter this home security market.

True

False

8. Regulating a natural monopoly

Consider the local telephone company, a natural monopoly. The following graph shows the monthly demand curve for phone services, the company's marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves.

Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints.

Complete the first row of the following table.

Pricing Mechanism

Short Run

Long-Run Decision

Quantity

Price

Profit

(Subscriptions)

(Dollars per subscription)

Profit Maximization

Multiple Choice

a.6,000 b.11,000 c.12,000

a.30 b.35 c.40 d.60

a. Neg

b. Pos

c. Zero

a. Exit the industry

b. Stay in business

c. Stay or exit

Marginal-Cost Pricing

Multiple Choice

a.6,000 b.11,000 c.12,000

a.30 b.35 c.40 d.60

a. Neg

b. Pos

c. Zero

a. Exit the industry

b. Stay in business

c. Stay or exit

Average-Cost Pricing

Multiple Choice

a.6,000 b.11,000 c.12,000

a.30 b.35 c.40 d.60

a. Neg

b. Pos

c. Zero

a. Exit the industry

b. Stay in business

c. Stay or exit

Suppose that the government forces the monopolist to set the price equal to marginal cost.

Complete the second row of the previous table.

Suppose that the government forces the monopolist to set the price equal to average total cost.

Complete the third row of the previous table.

True or False: Over time, the telephone company has a very strong incentive to lower costs when subject to average-cost pricing regulations.

True

False

9. More theories of regulation

Which of the following points supports the capture theory of regulation?

Regulators tend to promote regulations that will expand the power, size, and budgets of their agencies.

Regulators tend to be highly moral and civic-minded people who seek to do what is best for the public interest.

Regulators often accept jobs in the industries that they once regulated after they leave the regulatory agency.

10. The costs and benefits of regulation

Additional regulation in a sector of the economy is socially advantageous whenever ______________.

(a. The total benefit to society of regulation exceeds the total cost of regulation

(b. Regulation does not lead to job loss in the sector

(c. The marginal benefit to society of additional regulation exceeds the marginal cost to society

11. Deregulation

Which of the following theories does not support deregulation?

Public interest theory of regulation

Capture theory of regulation

Public choice theory of regulation

1. Externalities

If the consumption of a good generates positive externalities, then which of the following is correct?

Market forces may lead to an underallocation of resources to producing the good.

The government can subsidize consumption of the good to increase efficiency.

Both of these answers are correct.

2. Externalities - Definition and examples

An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a ___________ (a.negative b.positive) externality.

The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good.

Shift one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should shift the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should shift the demand curve to reflect the social value of consuming the good.

With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be ___________ (a.greater b.less) than the socially optimal quantity.

Which of the following generate the type of externality previously described? Check all that apply.

The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents.

Jake has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season.

Your roommate, Nick, has bought a bird that keeps you up at night with its chirping.

A microbiology lab has published its breakthrough in swine flu research.

3. The effect of negative externalities on the optimal quantity of consumption

Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of bolts imposes a constant external cost of $165 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts.

Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $165 per ton.

The market equilibrium quantity is __________ (a.1.5 b.2 c.2.5 d.3 e.3.5 f.4 g.4.5 h.5 i.5.5) tons of bolts, but the socially optimal quantity of bolt production is __________ (a.1.5 b.2 c.2.5 d.3 e.3.5 f.4 g.4.5 h.5 i.5.5) tons. To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a ___________ (a.tax b.subsidy) ofper ton of bolts.

4. Efficiency in the presence of externalities

Parks confer many external benefits on society: open space, trees that reduce pollution, and so on. Therefore, the market equilibrium quantity of parks is not equal to the socially optimal quantity. The following graph shows the demand for parks (their private value), the supply of parks (the private cost of producing them), and the social value of parks, including both the private value and external benefits.

Use the black point (plus symbol) to indicate the market equilibrium quantity. Next, use the purple point (diamond symbol) to indicate the socially optimal quantity. Finally, use the grey polygon (star symbol) to indicate the area representing market failure.

Which of the following policies could help the government achieve the efficient outcome? Check all that apply.

Introduce emission taxes

Offer a subsidy equal to the price at the efficient outcome

Offer a subsidy to consumers equal to the vertical distance between the marginal private benefit curve and the marginal social benefit curve

Offer a subsidy to producers equal to the vertical distance between the marginal private benefit curve and marginal social benefit curve

Implement tradable pollution permits

5. The effects of property rights on achieving efficiency

Consider a lake found in the town of Center Barnstead, and then answer the questions that follow.

The town has a hiking lodge whose visitors use the lake for recreation. The town also has a tannery that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the tannery's waste decreases the hiking lodge's economic profit.

Suppose that the tannery could use a different production method that involves recycling water. This would reduce the pollution in the lake to levels safe for recreation, and the hiking lodge would no longer be affected. If the tannery uses the recycling method, then the tannery's economic profit is $1,300 per week, and the hiking lodge's economic profit is $2,300 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,100 per week, and the hiking lodge's economic profit is $1,100 per week. These figures are summarized in the following table.

Complete the following table by computing the total profit (the tannery's economic profit and the hiking lodge's economic profit combined) with and without recycling.

Action

Profit

Tannery

Hiking Lodge

Total

(Dollars)

No Recycling

2,100

1,100

Recycling

1,300

2,300

Total economic profit is highest when the recycling production method is __________ (a.not used b.used).

When the tannery uses the recycling method, the hiking lodge earns $2,300-$1,100 = $1,200 more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $1,200 per week for the tannery to recycle water. However, the recycling method decreases the tannery's economic profit by $2,100-$1,300=$800 per week. Therefore, the tannery should be willing to use the recycling method if it is compensated with at least $800 per week.

Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the tannery will ____________ (a.not use b.use) the recycling method and will pay the hiking lodge _________

(a.$0 b. between $0 and $400 c. Between $400 and $800 d. between $800 and $1,200) per week.

Now, suppose the tannery has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain at no cost, the tannery will _________ (a.not use b.use) the recycling method, and the hiking lodge will pay the tannery _____________ (a.$0 b. between $0 and $400 c. Between $400 and $800 d. between $800 and $1,200) per week.

The hiking lodge will make the most economic profit when _____________ (a.the tannery has property rights to pollute the lake b.It has property rights to a clean lake).

True or False: The lake will remain polluted, regardless of who has the property rights.

True

False

6. Achieving lower pollution

Suppose the Environmental Protection Agency (EPA) wants to mandate that all methane emissions must be reduced to zero in order to alleviate global warming in the United States.

Which of the following describes why most economists would disagree with this policy?

Society would not benefit from lower air pollution.

The opportunity cost of zero pollution is much higher than its benefit.

Reducing methane emissions is desirable, but whatever levels of pollution firms decide to emit privately are already efficient.

The environment isn’t worth protecting.

7. Correcting for negative externalities - Regulation versus tradable permits

Suppose the government wants to reduce the total pollution emitted by three local firms. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. If the government wants to reduce total pollution in the area to 6 units, it can choose between the following two methods:

Available Methods to Reduce Pollution

The government sets pollution standards using regulation.

The government allocates tradable pollution permits.

Each firm faces different costs, so reducing pollution is more difficult for some firms than others. The following table shows the cost each firm faces to eliminate each unit of pollution. For each firm, assume that the cost of reducing pollution to zero (that is, eliminating all 4 units of pollution) is prohibitively expensive.

Firm

Cost of Eliminating the . . .

First Unit of Pollution

Second Unit of Pollution

Third Unit of Pollution

(Dollars)

Firm X

125

180

Firm Y

110

Firm Z

650

800

1,500

Now, imagine that two government employees propose alternative plans for reducing pollution by 6 units.

Method 1: Regulation

The first government employee suggests to limit pollution through regulation. To meet the pollution goal, the government requires each firm to reduce its pollution by 2 units.

Complete the following table with the total cost to each firm of reducing its pollution by 2 units.

Firm

Total Cost of Eliminating Two Units of Pollution

(Dollars)

Firm X

Firm Y

Firm Z

Method 2: Tradable Permits

Meanwhile, the other employee proposes using a different strategy to achieve the government’s goal of reducing pollution in the area from 12 units to 6 units. He suggests that the government issue two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution. Firms are free to trade pollution permits with one another (that is, buy and sell them) as long as both firms can agree on a price. For example, if firm X agrees to sell a permit to firm Y at an agreed-upon price, then firm Y would end up with three permits and would need to reduce its pollution by only 1 unit, while firm X would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless.

Because firm Z has high pollution-reduction costs, it thinks it might be better off buying a permit from firm Y and a permit from firm X, so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm Y and firm X willing to sell one of their permits to firm Z ? Check all that apply.

$109

$149

$170

$579

$787

Suppose the owners of the three firms get together and agree on a trading price of $498 per permit.

Complete the following table with the action each firm will take at this permit price, the amount of pollution each firm will eliminate, and the amount it costs each firm to reduce pollution to the necessary level. If a firm purchases two permits, assume that it buys one permit from each of the other firms. (Hint: Do not include the prices paid for permits in the cost of reducing pollution.)

Firm

Initial Pollution Permit Allocation

Action

(Multiple Choice)

Final Amount of Pollution Eliminated

Cost of Pollution Reduction

(Units of pollution)

(Dollars)

Firm X

a.Buy one permit

b. Buy two permits

c.Don’t buy/sell

d. Sell one permit

e. Sell two permits

Firm Y

a.Buy one permit

b. Buy two permits

c.Don’t buy/sell

d. Sell one permit

e. Sell two permits

Firm Z

a.Buy one permit

b. Buy two permits

c.Don’t buy/sell

d. Sell one permit

e. Sell two permits

Regulation Versus Tradable Permits

Determine the total cost of eliminating six units of pollution using both methods, and enter the amounts in the following table. (Hint: You might need to get information from previous tasks to complete this table.)

Proposed Method

Total Cost of Eliminating Six Units of Pollution

(Dollars)

Regulation

Tradable Permits

In this case, you can conclude that eliminating pollution is __________ (a.less b.more) costly to society when the government distributes tradable permits than when it regulates each firm to eliminate a certain amount of pollution.

8. Rivalry and excludability

A good is nonrivalrous if:

One person's benefit from the good does not reduce the benefit available to other people.

It is not possible to prevent an individual from using the good.

The quantity of the good is affected by the price a consumer pays for the good.

Those who are unwilling or unable to pay for the good do not obtain its benefits.

9. Market failure associated with public goods

A group of university students buys coconuts from a farmers' market. The students consume the meat of the coconuts for food and use the shells to make sculptures. These sculptures are placed in a public park that any student can visit. The park sustains itself through students' donations.

Some individuals have no incentive to donate to the park and will, instead, depend on those who do donate. This is an example of which of the followingf?

Overuse of coconuts

Socially efficient allocation of coconuts

The free-rider problem

A negative externality

10. The market for lemons

Consider a market in which there are many potential buyers and sellers of used cars. Each potential seller has one car, which is either of high quality (a plum) or low quality (alemon). A seller with a low-quality car is willing to sell it for $3,500, whereas a seller with a high-quality car is willing to sell it for $9,000. A buyer is willing to pay $4,500 for a low-quality car and $11,000 for a high-quality car. Of course, only the seller knows whether a car is of high or low quality, as illustrated in the accompanying image.

Suppose that 85% of sellers have low-quality cars. Assume buyers know that 85% of sellers have low-quality cars but are unable to determine the quality of individual cars.

If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is

(Hint: The expected value of a car is the sum of the probability of getting a low-quality car multiplied by the value of a low-quality car and the probability of getting a high-quality car multiplied by the value of a high-quality car.)

Suppose buyers are willing to pay only up to the expected value of a car that you found in the previous question.

Since sellers of low-quality cars are willing to sell for $3,500, while sellers of high-quality cars are willing to sell for $9,000, ___________ (a.only low-quality sellers b.only high-quality sellers c.no sellers d.all types of sellers) will be willing to participate in this market at that price.

The dilemma in this problem is an example of which of the following economic concepts?

Moral hazard

Signaling

Adverse selection

Screening

11. How asymmetric information prevents gains from trade

Larry sees a classified ad from Megan offering a used DVD player for $30. On the opposite page, he sees a big color ad from a national electronics chain offering a new DVD player for $175. Larry values a DVD player at $220 as long as it works, regardless of whether it is new or used.

For each of the scenarios listed, determine the principle illustrated by each person’s reasoning.

Scenario

Moral Hazard

Adverse Selection

Suppose Megan, the seller of the DVD player, knows the player works well—she is selling it only because she got a better model as a gift. She thinks about asking $45 and offering a guarantee: She will replace the DVD player with a new $175 DVD player if it turns out not to work. Then she thinks, "That's not a good idea! Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new DVD player for $45—meanwhile, I'll be out $130!"

Suppose Larry buys the new DVD player from the national electronics chain, thinking "Someone would ask $30 for a used DVD player only if it didn't work well."

Why is Megan unable to sell Larry the DVD player? Check all that apply.

Moral hazard can prevent sellers from offering guarantees of quality, because they can't be sure that buyers won't try to take advantage of the guarantees by filing false claims.

Adverse selection can cause buyers to avoid purchasing high-quality goods because of uncertainty about their quality.

0 notes