Lecture Issues in economics today - Chapter 32

The main contents of this chapter include all of the following: The explanation of antitrust, major antitrust laws, modern antitrust, types of mergers, the effectiveness of antitrust, the trend toward bigness, the microsoft case.

Chapter 32 Farm Policy   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Chapter Outline • FARM PRICES SINCE 1950 • PRICE VARIATION AS A JUSTIFICATION FOR GOVERNMENT INTERVENTION • CONSUMER AND PRODUCER SURPLUS ANALYSIS OF PRICE FLOORS • PRICE SUPPORT MECHANISMS AND THEIR HISTORY McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Farm Prices Since 1950 Raw food commodity prices have increased much more slowly than overall inflation • From 1982 to 1998 overall inflation was 68% • Most food commodities cost less in 2000 than in 1982 in nominal terms (40% less in real terms.) • Hog prices in 2000 yielded less than 40% of their 1982 levels   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved P r ic e In d e x ( = 0 ) Farm Price Inde 1982=100 180 160 140 120 100 80 60 40 20 1950 1955 1960 1965 1970 1975 1980 1985 1990 Year   McGraw­Hill/Irwin   Corn Beef hog Soybea Milk CPI © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Price Variability as the Justification for Government Intervention • Argument for intervention on this ground – Highly variable prices create an unstable income for farmers reducing their interest in farming • Argument against intervention on this ground – Using options markets and crop insurance farmers can dampen the impact of this variability   McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Price Floors A Price Floor (a price below which a commodity may not sell) is set to protect farmers from prices that go “too low.”   McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Farm Markets Without Subsidies P S A • • P* • C • H Value to the Consumer: • 0ACQ* Consumers Pay Producers: • OP*CQ* The Variable Cost to Producers: • OHCQ* Consumer Surplus: • P*AC Producer Surplus: • HP*C D   McGraw­Hill/Irwin Q*   Q/t © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Price Floors P S A Pfloor • Value to the Consumer: • 0ABQD • Consumers Pay Producers: • OPfloorBQD • The Variable Cost to Producers: • OHGQD • Consumer Surplus: • PfloorAB • Producer Surplus: • HPfloorBG • DWL • BEC B Price Floor P* C G H D   McGraw­Hill/Irwin QD Q*   Q/t © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Government Purchase of Excess Goods P S A B Pfloor P* E I • Consumers Pay Producers: • OPfloorBQD • Government Pays Producers: • QDBEQs • The Variable Cost to Producers: • OHEQS • Consumer Surplus: • PfloorAB • Producer Surplus: • HPfloorE • DWL • ECF C H F J   Value to the Consumer: • OABQD Price Floor G McGraw­Hill/Irwin • D QD Q* QS   Q/t © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved P Government Lowers the Price to Consumers • Value to the Consumer: A B Pfloor P* • OAFQS S E • Consumers Pay Producers: • OJFQS • Government Pays Producers: • JPfloorEF • The Variable Cost to Producers: • OHEQS • Consumer Surplus: • JAF Producer Surplus: • HPfloorE Price Floor I C G H • F J   D QD Q* McGraw­Hill/Irwin QS •   Q/t DWL ECF â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Variable Floors The Eau Claire Rule: the wholesale price floor on milk is set as a function of the distance between a given community and Eau Claire, Wisconsin • This subsidizes milk production on the coasts of the United States   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved What Would Happen Without Price Floors • Prices would fall • Production would fall • Farmers would leave the industry until the price of commodities reached a level consistent with zero economic profit (normal profit)   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved History of Price Supports: Buying programs • Began in the 1930s • Reached a peak in the 1980s • The federal government purchased vast quantities of corn, soybeans, milk to be stored The milk was powdered or turned into blocks of American Cheese • The cheese given away to the poor in the 1982 recession (which was the origin of the phrase “government cheese”.)   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved History of Price Supports: Output Restrictions • The buying programs were ended in the 1980s and were replaced with programs where the government offered higher prices for limited production • The programs – purchased dairy herds and slaughtered them – Ordered grain farmers to set aside plots if they wanted the subsidized price   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved  ... variable prices create an unstable income for farmers reducing their interest in farming • Argument against intervention on this ground – Using options markets and crop insurance farmers can dampen... inflation • From 1982 to 1998 overall inflation was 68% • Most food commodities cost less in 2000 than in 1982 in nominal terms (40% less in real terms.) • Hog prices in 2000 yielded less than 40% of... McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Farm Prices Since 1950 • Raw food commodity prices have increased much more slowly than overall inflation • From