ECO 481: Public Choice Theory
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ECO 481:Public Choice Theory
Week 6 – Part I:Week 6 – Part I:In Praise of MarketsIn Praise of Markets
Dr. Dennis Foster
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Simple ObservationsSimple 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.
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The Nature of the The Nature of the MarketMarket
• 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!
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Monopoly ReconsideredMonopoly 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 . . .
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Dairy Price SupportsDairy Price SupportsBasic Formula Price (BFP)
= last month's average price paid for manufacturing = last month's average price paid for manufacturing grade milk in Minnesota and Wisconsingrade milk in Minnesota and Wisconsin+ [current grade AA butter price X 4.27 + current non-dry + [current grade AA butter price X 4.27 + current non-dry milk price X 8.07 - current dry-buttermilk price X 0.42]milk price X 8.07 - current dry-buttermilk price X 0.42] + [current cheddar cheese price X 9.87 + current grade A + [current cheddar cheese price X 9.87 + current grade A butter price X 0.238] butter price X 0.238] - [last month's grade A butter price X 4.27 + last month's - [last month's grade A butter price X 4.27 + last month's nondry-milk price X 8.07 + last month's dry-buttermilk nondry-milk price X 8.07 + last month's dry-buttermilk price X 0.42] price X 0.42] - [last month's cheddar cheese price X 9.87 + last month's - [last month's cheddar cheese price X 9.87 + last month's grade A butter price X 0.238] grade A butter price X 0.238] + (present butter fat - 3.5) X [current month's butter price + (present butter fat - 3.5) X [current month's butter price X 1.38] X 1.38] - [last month's price of manufacturing grade milk in - [last month's price of manufacturing grade milk in Minnesota-Wisconsin X 0.028].Minnesota-Wisconsin X 0.028].
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Rethinking the firmRethinking 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?
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The Virtues of the The Virtues of the MarketMarket
• 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?
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ECO 481:Public Choice Theory
Week 6 – Part I:Week 6 – Part I:In Praise of MarketsIn Praise of Markets
Dr. Dennis Foster