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15 Cards in this Set
- Front
- Back
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Antitrust law
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They restrict the actions of monopolies and blocks mergers.
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The economic theory of government explains:
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The purpose of governments, the economic choices that governments make, and the consequences of those choices.
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Governments exist for two main economic reasons:
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1- To establish property rights and set the rules for the redistribution of income and wealth.
2- To provide way for allocating scarce resources when the market economy results in inefficiency |
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Market Failure
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When the market economy results in inefficiency.
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Public choices deal with five economic problems.
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*Monopoly and oligopoly regulation
*The provision of public goods *The use of common resources *Externalities *Income redistribution |
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Free-rider problem
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The market produces goods because it is impossible to exclude non-payers from enjoying them
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Public choice theory
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It applies the economic way of thinking to the choices that people and governments make in a political marketplace.
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political equilibrium
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the outcome of the choices of voters, politicians, and bureaucrats.
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social interest theory
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regulations are supplied to satisfy the demand of consumers and producers to maximize the sum of consumer and producer surplus—to attain efficiency.
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capture theory
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regulations are supplied to satisfy the demand of producers to maximize producer surplus—to maximize economic profit. In this case, regulation seeks to maximize profits.
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marginal cost pricing rule
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sets price equal to marginal cost
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average cost pricing rule
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sets price equal to average total cost.
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rate of return regulation
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Under this, a regulated firm must justify its price by showing that the price enables it to earn a specified target percent rate of return on its capital.
The target rate of return is set at that of a competitive market and with accurate cost observation is this type of regulation is equivalent to average cost pricing. Managers have an incentive to use more capital than the efficient quantity so that total returns increase. They also have an incentive to inflate depreciation charges and other costs and deflate reported profits. |
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price-cap regulation
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It's a price ceiling—a rule that specifies the highest price the firm is permitted to set.
Price cap regulation gives managers an incentive to minimize cost because there is no limit on the rate of return they are permitted to earn. |
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earnings sharing regulation
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profits that exceed a target level must be shared with the firm’s customers.
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