COBWEB MODEL Ao CHEMICALS (millions of pounds/year) Price SUPPOSE PRICE IS ABOVE EQUILIBRIUM PRICE....
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Transcript of COBWEB MODEL Ao CHEMICALS (millions of pounds/year) Price SUPPOSE PRICE IS ABOVE EQUILIBRIUM PRICE....
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COBWEB MODEL
Ao
CHEMICALS (millions of pounds/year)
Price
SUPPOSE PRICE IS ABOVE EQUILIBRIUMPRICE. QUANTITY SUPPLIED IS GREATERTHAN QUANTITY DEMANDED.
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COBWEB MODEL
AoA1
CHEMICALS (millions of pounds/year)
Price
A price above equilibrium causes the producersto provide a higher quantity supplied than whatis demanded.
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COBWEB MODEL
AoA1
A2
CHEMICALS (millions of pounds/year)
Price
Such a high quantitysupplied means that prices fall, as indicatedby the demand curve
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COBWEB MODEL
AoA1
A2
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CHEMICALS (millions of pounds/year)
Price
Such a low price means that Chemicalfirms cut back production.
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COBWEB MODEL
AoA1
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Bo
CHEMICALS (millions of pounds/year)
Price
Such little supply means thatthe price rises to the amount indicated on the demand curve
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COBWEB MODEL
AoA1
A2
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Bo
CHEMICALS (millions of pounds/year)
Price
With such a high price, the quantity suppliedrises.
B1
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COBWEB MODEL
AoA1
A2
A3
Bo
B1
B2
CHEMICALS (millions of pounds/year)
Price
With so much supply, price falls
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COBWEB MODEL
AoA1
A2
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Bo
B1
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CHEMICALS (millions of pounds/year)
Price
Such a low price provides no incentiveto produce any product at all.
WHAT PREVENTS THE UNSTABLE CYCLE?
- MORE INELASTIC SUPPLY- A LONG TIME HORIZON- INSTANTANTANEOUS FEEDBACK ABOUT PRICES- IMMEDIATE ADJUSTMENT OF PRODUCTION- COUNTERCYCLICAL INVENTORY POLICY (requiring storable goods) - EXTRA CAPACITY- MARKET POWER- COMMUNICATION, PLANNING OF MEMBERS IN MARKET. INFORMATION ON MARKET- MARKETS THAT ALLOW SPECULATION AGAINST UNSTABLE BEHAVIOR
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COBWEB MODEL
AoA1
A2
A3
Bo
B1
B2B3
CHEMICALS (millions of pounds/year)
Price
Quintiles Based on Per Capita Income
Quin-tile
Cumu-lative %
% ofWorldGNP
Cumu-lative% GNP
Inequal-ity(2)-(4)
AverageInaequal-ity/%
Inequal-ity %
(1) (2) (3) (4) (5) (6) (7)
0 0 0
20 20 1.80 1.80 18.2 9.1 182
30 50 2.58 4.38 45.62 31.91 957
10 60 2.53 6.91 53.09 49.36 494
20 80 17.22 24.13 55.87 54.48 1090
20 100 75.87 100 0 27.94 559
Total 100.00 Measure of Inequality
32.81
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1 0
2 0
3 0
4 0
5 0
6 0
7 0
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9 0
1 0 0
0 2 0 4 0 6 0 8 0 1 0 0
Cumulative % of:Coun- GNPtries
0 0 20 1.8 50 4.4 60 6.9 80 24.1100 100
WORLD INCOME DISTRIBUTION
0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100
WORLD INCOME DISTRIBUTION
LINE OFEQUALITY
USA
WORLD
MEASUREMENT OF BENEFITSupply WITHOUTCFC Regulation
Supply WITHCFC Regulation
Demand
Price of Fish
Fish (tons per year)
INCREMENTALBENEFIT OFCURBING POLLUTION
Social Costs and BenefitsRegulatoryPolicy
TotalBenefits
SocialCosts
Increment-al Benefits
Increment-al Costs
Net SocialBenefits
(beginning (1) (2) (3) (4) (5)=(3)-(4)
NoControls*
0 0 0 - -
CFCfreeze(1989)
3314 7 3314 7 3307
CFC 20%(1993)
3396 12 82 5 77
CFC 50%(1998)
3488 13 92 1 91
CFC 80%(2003)
3553 22 65 9 56
CFC 99%**(2005)
3583 53 30 31 -1
*Base used for comparison for computring benefits and costs of phasing out CFCs ** Hypotehtical
SOCIAL COSTS AND BENEFITS
7 5 19
31
8292
65
30
0102030405060708090100
0 20 50 80 99
Incremental Social Benefit
IncrementalSocial Cost
43154
10873
3419490
5000
10000
15000
20000
25000
30000
35000
40000
45000
0 1 2 3 4 5 6
IMPACT OF THE DISCOUNT RATE
COSTS OF DECISIONS
ExternalCosts ofExcludingPeople fromDecision
Minimum Cost
InternalCosts ofGainingDecision
Total of Internal& ExternalCosts
Dictatorship (0%) Majority (50%) Unanimity (100%) PERCENT OF PEOPLE REQUIRED FOR DECISION
$ OF COST
GOVERNMENT STUDIESType ofStudy
Objective of Study Definition andFocus
ImplicitConstraints
Problem________
Cost BenefitAnalysis
Net Social Benefit Benefits & costsincluded towhomeveroccurring
None Comprehensivemeasurement ofbenefits & costs ishard
Regulatory ImpactAnalysis
Net Social Benefit& other socialobjectives
Includes costbenefit analysis andother studies
Environmental &other constraints
Goes beyond cost-benefit, butbecomes verysubjective
Economic ImpactAnalysis
Describe allregulatoryt impacts
Examines price,output, financial, &employmentimpacts
Assumes impactsshould be minimal
Regulationdiscouraged.Limited weighingof costs/benefits
Closure Analysis Maximizeregulatoryobjective
Defines degree ofregulation that willshut firms down
Implicitly, firmsare not to be shutdown
Overregulatesprofitable,underregulatesunprofitable
Cost EffectivenessAnalysis
Maximize pollutionabatement, etc.
Avoids $ value onbenefits ofgovernmentintervention
Budget or costconstraint limitsamount ofintervention
Comparisonsdifficult acrossdifferent types ofintervention
Fiscal ImpactAnalysis
Up to decisionmakers
Focuses only ongovt. unit
Govt. revnue mustexceed cost
Ignores costws &benefits to society
MARKET GOVERNMENT GOVERNMENTFAILURE INTERVENTION FAILURE EXTERNALITY PUBLIC ENTERPRISE -PUBLIC GOODS-NATIONALIZATION MARKET -PRIVATIZATION POWER REGULATION INEQUITIES - OUTPUT DYNAMIC - PRICE MKT. FAIL. - STANDARDS INDIVISIBILITY ANTITRUST INFORMATION -STRUCTURE ASYMMETRY -CONDUCT TAXES (SUBSIDIES) PROVISION OF INFORMATION RATIONING (MONEY)
MARKET GOVERNMENT GOVERNMENTFAILURE INTERVENTION FAILURE EXTERNALITY PUBLIC ENTERPRISE ADMINISTRATIVE-PUBLIC GOODS-NATIONALIZATION COSTMARKET -PRIVATIZATION COMPLIANCE POWER REGULATION COSTINEQUITIES - OUTPUT EFFICIENCY COSTDYNAMIC - PRICE - NEGATIVE EXTER. MKT. FAIL. - STANDARDS -PUBLIC BADSINDIVISIBILITY ANTITRUST - MKT POWERINFORMATION -STRUCTURE - INEQUITIES ASYMMETRY -CONDUCT - DYNAMIC TAXES (SUBSIDIES) - INDIVISIBILITY PROVISION OF - INFORMATION INFORMATION RATIONING (MONEY)
Types of Control Government Failures that leadby Governing Bodies to Stronger Government
No Central Control Tyranny (Dictatorship) by the Strongest
Confederation Indecisiveness: Extortion by the Weakest
Central Control Dictatorship by the strongest
Examples of World Governing Bodies & Treaties
United Nations (Security Council)World Trade Organization (precursor: GATT)World Bank & IMFMontreal Guidelines (CFCs)SALTRegional Groups: NAFTA, EEC (& Euro),NATOGeneva Conventions & the HagueLand Mine Convention Extradition TreatiesLaw of the SeaLaw of AntarcticaLaw of Space