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ECO 481:
Public Choice Theory
Week 7:
Producer Rigged Markets
& 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 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.”
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.
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. The more sellers, the harder it is to form a cartel.
2. The more non-homogeneous the product, the
harder it is to form a cartel.
3. The more excess capacity, the harder it is to form
a cartel.
Pt. II: Consumer Protection
Agoraphobia
• There is no “personal” benefit to understanding 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
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?
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.
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?
• Of course! Volvos vs. Yugos.
• Choices are rational.
$
S
• Market caters to many preferences.
D-ra
• Government caters to one.
• Airbags - costly in $ and lives!
D-rt
Q* Q-max
• “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.”
Safety
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.)
ECO 481:
Public Choice Theory
Week 7:
Producer Rigged Markets
& Consumer Protection
Dr. Dennis Foster