Tài liệu Microeconomics for MBAs 26 pdf

Chapter 7 Market Failures: External Costs And Benefits 20 monopoly on the product by raising the price after the buyer commits to it at the attrac- tive initial price. The seller may promise not to raise the price, but the buyer will be taking an expensive risk to trust the honesty of the promise. A long-term contract is possible, but it is difficult to specify all the contingencies under which a price increase (or decrease) would be justified. Also, such a contract can reduce the flexibility of the buyer as well as the seller, and legal action to enforce the contract is expensive. Another possibility is for the seller to give up his or her monopoly position by licensing another firm to sell the product. By doing so the seller makes his or her promise to charge a reasonable price in the future credible, since if the seller breaks the promise the buyer can turn to an alternative seller. Giving up a monopoly position is a costly move of course, but it is exactly what semiconductor firms that have developed patented chips have done. To make credible their promise of a reliable and competitively priced supply of a new proprietary chip (the use of which requires costly commitments by the user), semiconductor firms have licensed such chips to competitive firms. Such a licensing arrangement is another example of making profits by way of a hostage intended to encourage honesty. 7 The more difficult it is for consumers to determine the quality of a product or service, the more advantage there is in committing to honesty with hostage arrangements. Consider the case of repair work. When someone purchases repair work on their car, for example, they can generally tell if the work eliminates the problem. The car is running again, the rattle is gone, the front wheels now turn in the same direction as the steering wheel, etc. But few people know if the repair shop charged them for only the repairs necessary, or if it charged them for lots of parts and hours of labor when tightening a screw was all that was done. One way repair shops can reduce the payoff to dishonest repair charges is through joint ownership with the dealership selling the cars being repaired. In this way the owner of the dealership makes future car sales a hostage to honest repair work. Dealerships depend on repeat sales from satisfied customers, and an important factor in how satisfied people are with their cars is the cost of upkeep and re- pairs. The gains a dealership could realize from overcharging for repair work would be quickly offset by reductions in both repair business and car sales. Automobiles are not the only products in which it is common to find repairs and sales tied together in ways that provide incentives for honest dealing. Many products come with guarantees entitling the buyer to repairs and replacement of defective parts for a specified period of time. These guarantees also serve as hostages against poor quality and high repair costs. Of course, guarantees not only provide assurance of quality, they provide protection against the failure of that assurance. Sellers often offer extra assur- ance, and the opportunity to reduce their risk, by selling a warranty with their product that extends the time, and often the coverage, of the standard guarantee. 7 When Intel developed its 286 microprocessor in the late 1970s, it gave up its monopoly by licensing other firms to produce it [as discussed by Adam M. Brandenburger and Barry J. Nalebuff, Co-opetition (New York: Currency/Doubleday, 1996), pp. 105-106]. Chapter 7 Market Failures: External Costs And Benefits 21 Moral Hazard and Adverse Selection While guarantees and warranties reduce the incentive of sellers to act dishonestly, they create opportunities for buyers to benefit from less than totally honest behavior. These opportunities are present to one degree or another in all forms of insurance and come as two separate problems, one known as moral hazard (or the tendency of behavior to change after contracts are signed, resulting in unfavorable outcomes from the use of a good or service) and the other known as adverse selection (or the tendency of people to buy good or service when they know their characteristics are undesirable to sellers). Consider first the problem of moral hazard. Knowing that a product is under guarantee or warranty can tempt buyers to use the product improperly and carelessly, and then blame the seller for the consequences. With this moral hazard in mind, sellers put restrictions on guarantees and warranties that leave buyers responsible for problems they are in the best position to prevent. For exam- ple, refrigerator manufacturers ensure against defects in the motor but not against damage to the shelves or finish. Similarly, automobile manufacturers ensure against problems in the engine and drive train (if the car has been properly serviced) but not against damage to the body and the seat covers. While such restrictions obviously serve the interests of sellers, they also serve the interests of buyers. When a buyer takes advantage of a guarantee by misrepresenting the cause of a difficulty with a product, all consumers pay because of higher costs to the seller. Buyers are in a prisoners’ dilemma in which they are better off collectively using the product with care and not exploiting a guarantee for problems they could have avoided. But without restrictions on the guarantee each indi- vidual is tempted to shift the cost of their careless behavior to others. Adverse selection is a problem associated with distortions arising from the fact that buyers and sellers often have different information that is relevant to a transaction. Most of this chapter has been concerned with the ways sellers commit themselves to honestly revealing the quality of products when they have more information about that quality than do buyers. But in the case of warranties it is the buyer who has crucial information that is difficult for the seller to obtain. Some buyers are harder on the prod- uct than average and others are easier on the product than average. The use of automo- biles is the most obvious example. Some people drive in ways that greatly increase the probability that their cars will need expensive repair work, while others drive in ways that reduce that probability. If a car manufacturer offers a warranty at a price equal to the average cost of repairs, only those who know that their driving causes greater than average repair costs will purchase the warranty, which is therefore being sold at a loss. If the car manufacturer attempts to increase the price of the warranty to cover the higher than expected repair costs, then more people will drop out of the market leaving only the worst drivers buying the warranty. 8 Even though people would like to be able to reduce their risks by purchasing war- ranties at prices that accurately reflect their expected repair bills, the market for these 8 This warranty problem is similar to the lemon problem discussed earlier in this chapter, but in this case it is the buyers who are supplying the lemons in the form of their behavior. Chapter 7 Market Failures: External Costs And Benefits 22 warranties can obviously collapse unless sellers can somehow obtain information on the driving behavior of different drivers. If all buyers were honest in revealing this information they would be better off collectively. But because individual buyers have a strong motivation to claim they are easier on their cars than they actually are, sellers of warranties try to find indirect ways of securing honest information on the driving behavior of customers. For example, warranties on “muscle” cars that appeal to young males are either more expensive, or provide less coverage, than warranties on station wagons. This section has focused primarily on business arrangements that motivate firms to deal honestly with customers, and our discussion of these arrangements is far from exhaustive. Honesty is also important in the interaction between shareholders and managers, employers and workers, and creditors and debtors, and many different types of arrangements exist that motivate trustworthy behavior in these relationships. Such business arrangements serve a variety of purposes such as marketing products, financing capital investment, and securing productive workers, but understanding any of them requires recognizing the importance business people attach to being able to commit themselves credibly to honesty in their dealings with others. Concluding Comments As we have argued, a market economy will overproduce goods and services that impose external costs on society. It will underproduce goods and services that confer external benefits. Sometimes, but not always, government intervention can be justified to correct for externalities. To be worthwhile, the benefits of action must outweigh the costs. Some ways of dealing with external costs and benefits are more efficient than others. Even when government intervention in the market is clearly warranted, the method of intervening must be carefully selected. Some critics of markets suggest that markets are bound to fail because of the gains to business from being dishonest, which implies a form of “externality.” While we would be the first to recognize the pervasiveness of dishonest behavior, we also hasten to stress that markets have built-in incentives for people to be more honest that they might otherwise be. Review Questions 1. The existence of external costs is not in itself a sufficient reason for government intervention in the production of steel. Why not? 2. “Population growth will lead to increased government control over people’s behavior.” Do you agree or disagree? Explain. 4. Developers frequently buy land and hold it on speculation; in effect they “bank” land. Should firms be permitted to buy and bank pollution rights in the same say? Would such a practice contribute to overall economic efficiency? Chapter 7 Market Failures: External Costs And Benefits 23 5. “If allowing firms to trade pollution rights lowers the cost of meeting pollution standards, it should also allow government to tighten standards without increasing costs.” Do you agree or disagree? Why? 6. If businesses are permitted to sell pollution rights, should brokers in pollution rights be expected to emerge? Why or why not? Would such agents increase the efficiency with which pollution is cleaned up? 7. If pollution rights are traded, should the government impose a price ceiling on them? Would such a system contribute to the efficient allocation of resources? 8. If you were a producer, which method of pollution control would you favor, the setting of government standards or the auction of pollution rights by government? Why? CHAPTER 8 Consumer Choice and Demand in Traditional and Network Markets It is not the province of economics to determine the value of life in “hedonic units” or any other units, but to work out, on the basis of the general principles of conduct and the fundamental facts of social situation, the laws which determine prices of commodities and the direction of the social economic process. It is therefore not quantities, not even intensities, of satisfaction with which we are concerned. . . .or any other absolute magnitude whatever, but the purely relative judgment of comparative significance of alternatives open to choice. Frank Knight eople adjust to changes in some economic conditions with a reasonable degree of predictability. When department stores announce lower prices, customers will pour through the doors. The lower the prices go, the larger the crowd will be. When the price of gasoline goes up, drivers will make fewer and shorter trips. If the price stays up, drivers will buy smaller, more economical cars. Even the Defense Department will reduce its planned purchases when prices rise. Behavior that is not measured in dollars and cents is also predictable in some respects. Students who stray from the sidewalks to dirt paths on sunny days stick to concrete when the weather is damp. Professors who raise their course requirements and grading standards find their classes are shrinking in size. Small children shy away from doing things for which they have recently been punished. When lines for movie tickets become long, some people go elsewhere for entertainment. On an intuitive level you find these examples reasonable. Going one step beyond intuition, the economist would say that such responses are the predictable consequences of rational behavior. That is, people who desire to maximize their utility can be expected to respond in these ways. Their responses are governed by the law of demand, a concept we first introduced in Chapter 3 and now take up in greater detail. Predicting Consumer Demand The assumptions about rational behavior described early in the book provide a good general basis for explaining behavior. People will do those things whose expected benefits exceed their expected costs. They will avoid doing things for which the opposite is true. By themselves, however, such assumptions do not allow us to predict future P Chapter 8 Consumer Choice and Demand in Traditional and Network Markets 2 behavior. The law of demand, which is a logical consequence of the assumption of rational behavior, does allow us to make predictions. The alert reader may sense an inconsistency in logic. Rational behavior is based on the existence of choice, but a true choice must be free—it cannot be predetermined or predicted. If we can predict a person’s behavior, can that individual be free to choose? Choice is not completely free, nor is complete freedom required by the concept of rationality. As discussed earlier, the individual’s choices are constrained by time and by physical and social factors that restrict his or her opportunities. There are limits to a person’s range of choice. Freedom exists within those limits. Our ability to predict is also limited. We cannot specify with precision every choice the individual will make. For instance, we cannot say anything about what Judy Schwartz wants or how much she wants the things she does. Before we can employ the law of demand, we must be told what she wants. Even given that knowledge, we can only indicate the general direction of her behavior. Theory does not allow us to determine how fast or how much her behavior will change. To see how consumer behavior can be predicted, we will derive the law of demand from the behavior of an individual consumer. Rational Consumption: The Concept of Marginal Utility The essence of the economist’s notion of rational behavior can be summed up this way: more goods and services are preferable to less (assuming that the goods and services are desired). This statement implies that the individual will use his entire income, in consumption or in saving or in some combination of the two, to maximize his satisfaction. It also implies that the individual will use some method of comparing the value of various goods. Generally speaking, the value the individual places on any one unit of a good depends on the number of units already consumed. For example, you may be planning to consume two hot dogs and two Cokes for your next meal. Although you may pay the same price for each unit of both goods, there is no reason to assume that you will place the same value on each. The value of the second hot dog—its marginal utility—will depend on the fact that you have already eaten one. The formula for marginal utility is change in total utility MU = change in quantity consumed Achieving Consumer Equilibrium Marginal utility determines the variety of a quantity of goods and services you consume. The rule is simple. If the two goods, Cokes and hot dogs, both have the same price, you will allocate your income so that the marginal utility of the last unit of each will be equal. Mathematically, the formula can be stated as MU c = MU h Chapter 8 Consumer Choice and Demand in Traditional and Network Markets 3 Where MU c equals the marginal utility of a Coke and MU h equals the marginal utility of a hot dog. If you are rational, and if the price of a Coke is the same as the price of a hot dog, the last Coke you drink will give you the same amount of enjoyment as the last hot dog you eat. When the marginal utilities of goods purchased by the consumer are equal, the resulting state is called consumer equilibrium. Consumer equilibrium is a state of stability in consumer purchasing patterns in which the individual has maximized his or her utility. Unless conditions—income, taste, or prices—change, the consumer’s buying patterns will tend to remain the same. An example will illustrate how equilibrium is reached. Suppose for the sake of simplicity that you can buy only two goods, Cokes and hot dogs. Suppose further that one of each cost the same price, $1, and you are going to spend your whole income. (How much your total income is and how many units of Coke or hot dogs you will purchase is unimportant. We simply assume that you purchase some combination of those two goods.) We will also assume that utility (joy, satisfaction) can be measured. As you remember from an earlier chapter, a unit of satisfaction is called a util. Finally, suppose that the marginal utility of the last Coke you consume is equal to 20 utils, and the marginal utility of the hot dog is 10 utils. Obviously you have not maximized your utility, for the marginal utility of your last Coke is greater than (>) the marginal utility of your last hot dog: MU c > MU h You could have purchased one less hot dog and used the dollar saved the to buy an additional Coke. In doing so, you would have given up 10 utils of satisfaction (the marginal utility of the last hot dog purchased), but you would have acquired an additional 20 utils from the new Coke. On balance, your total utility would have risen by 10 utils (20 – 10). If you are rational, you will continue to adjust your purchases of Coke and hot dogs until their marginal utilities are equal. Even if you would prefer to spend your first dollar on a hot dog, after eating several you might wish to spend your next dollar on a Coke. Purchases can be adjusted until they reach equilibrium because as more of a good is purchased, its relative marginal utility decreases—a phenomenon known as the law of diminishing marginal utility. According to the law of diminishing marginal utility, as more of a good is consumed, its marginal utility or value relative to the marginal value of the good or goods given up eventually diminishes. Thus, if MU h > MU c , and MU h falls relative to MU c as more hot dogs and fewer Cokes are consumed, sooner or later the result will be MU h = MU c . Adjusting for Differences in Price and Unit Size Cokes and hot dogs are not usually sold at exactly the same price. To that extent, our analysis has been unrealistic. If we drop the assumption of equal prices, the formula for maximization of utility becomes: Chapter 8 Consumer Choice and Demand in Traditional and Network Markets 4 MU c = MU h P c P h Where MU c equals the marginal utility of a Coke, MU h the marginal utility of a hot dog, P c the price of a Coke, a P h the price of a hot dog. This is the same formula we used before, but because the price of the goods was the same in that example, the denominators canceled out. When prices differ, the denominator must be retained. The consumer must allocate his or her money so that the last penny spent on each commodity yields the same amount of satisfaction. Suppose a Coke costs $0.50 and the price of a hot dog is $1. If you buy hot dogs and Cokes for lunch and the marginal utility of the last Coke and hot dog you consume are the same, say 15 utils, you will not be maximizing your satisfaction. In relation to price, you will value your Coke more than your hot dog. That is, MU c /P c (or 15 utils/$0.50) exceeds MU h /P h (or 15 utils/$1). You can improve your welfare by eating fewer hot dogs and drinking more Cokes. By giving up a hot dog, you can save a dollar, which you can use to buy two Cokes. You will lose 15 utils by giving up the hot dog, something you would probably prefer not to do. You will regain that loss with the next Coke purchased, however, and the one after that will permit you to go beyond your previous level of satisfaction. Therefore, if you are rational, you will adjust your purchases until the utility-price ratios of the two goods are equal. As you consume more Coke, the relative value of each additional Coke will diminish. If you reach a point where the next Coke gives you 10 utils and the next hot dog yields 20 utils, you will no longer be able to increase your satisfaction by readjusting your purchases. By giving up the next hot dog, you save $1 and lose 20 utils of satisfaction. Now the most you can accomplish by using that $1 to buy two Coke instead is to recoup your loss of 20 utils. In fact, the value of the second new Coke may be less than 10 utils, so you may actually lose by giving up the hot dog. So far we have been talking in terms of buying whole units of Cokes and hot dogs, but the same principles apply to other kinds of choices as well. Marginal utility is involved when a consumer chooses a 12-ounce rather than a 16-ounce can of Coke, or a regular-size hot dog rather than a foot-long hot dog. The concept could also be applied to the decision whether to add cole slaw and chili to the hot dog. The pivotal question the consumer faces in all these situations is whether the marginal utility of the additional quantity consumed is greater or less than the marginal utility of other goods that can be purchased for the same price. Most consumers do not think in terms of utils when they are buying their lunch, but in a casual way, they do weigh the alternatives. Suppose you walk into a snack bar. If your income is unlimited, you have no problem. If you can only spend $3 for lunch, however, your first reaction may be to look at the menu and weigh the marginal values of the various things you can eat. If you have twenty cents to spare, do you not find yourself mentally asking whether the difference between a large Coke and a small one is worth more to you than lettuce and tomato on your hamburger? (If not, why do you choose a small Coke instead of a large one?) You are probably so accustomed to making decisions of this sort that you are almost unaware of the act of weighing the marginal values of the alternatives. Chapter 8 Consumer Choice and Demand in Traditional and Network Markets 5 Consumers do not usually make choices with conscious precision. Nor can they achieve a perfect equilibrium—the prices, unit sizes, and values of the various products available may not permit it. They are trying to come as close to equality as possible, The economist’s assumption is that the individual will move toward equality, not that he will always achieve it. Changes in Price and the Law of Demand Suppose your marginal utility for Coke and hot dogs is as shown in the table below. Marginal Utility of Marginal Utility of Unit Consumed Cokes (at $0.50) Hot Dogs (at $1) First 10 utils 30 utils Second 9 utils 15 utils Third 3 utils 12 utils If a Coke is priced at $0.50 and a hot dog at $1, $3 will buy you two hot dogs and two Cokes—the best you can do with $3 at those prices. Now suppose the price of Coke rises to $0.75 and the price of hot dogs falls to $0.75. With a budget of $3 you can still buy two hot dogs and two Cokes, but you will no longer be maximizing your utility. Instead you will be inclined to reduce your consumption of Coke and increase your consumption of hot dogs. At the old prices, the original combination (two Cokes and two hot dogs) gave you a total utility of only 64 utils (45 from hot dogs and 19 from Coke). If you cut back to one Coke and three hot dogs now, your total utility will rise to 67 utils (57 from hot dogs and 10 from Coke). Your new utility-maximizing combination—the one that best satisfies your preferences—will therefore be one Coke and three hot dogs. No other combination of Coke and hot dogs will give you greater satisfaction. (Try to find one.) To sum up, if the price of hot dogs goes down relative to the price of Coke, the rational person will buy more hot dogs. If the price of Coke rises relative to the price of hot dogs, the rational person will buy less Coke. This principle will hold true for any good or service and is commonly known as the law of demand. The law of demand states the assumed inverse relationship between product price and quantity demanded, everything else held constant. If the relative price of a good falls, the individual will buy more of the good. If the relative price rises, the individual will buy less. Figure 8.1 shows the demand curve for Coke—that is, the quantity of Coke purchased at different prices. The inverse relationship between price and quantity is reflected in the curve’s downward slope. If the price falls from $1 to $0.75, the quantity the consumer will buy increases from two Cokes to three. The opposite will occur if the price goes up. Thus the assumption of rational behavior, coupled with the consumer’s willingness and ability to substitute less costly goods when prices go up, leads to the law of demand. Chapter 8 Consumer Choice and Demand in Traditional and Network Markets 6 We cannot say how many Cokes and hot dogs a particular person will buy to maximize his or her satisfaction. That depends on the individual’s income and preferences, which depend in turn on other factors (how much he likes hot dogs, whether he is on a diet, and how much he worries about the nutritional deficiencies of such a lunch). We can predict the general response, whether positive or negative, to a change in prices. FIGURE 8.1 The Law of Demand Price varies inversely with the quantity consumed, producing a downward-sloping curve like this one. If the price of Coke falls from $1 to $0.75, the consumer will buy three Cokes instead of two. Price is whatever a person must give up in exchange for a unit of goods or services purchased, obtained, or consumed. It is a rate of exchange and is typically expressed in dollars per unit. Note that price is not necessarily the same as cost. In an exchange between two people—a buyer and a seller—the price at which a good sells can be above or below the cost of producing the good. What the buyer gives up to obtain the good does not have to match what the seller-producer gives up in order to provide the good. Nor is price always stated in dollars and cents. Some people have a desire to watch sunsets—a want characterized by the same downward-sloping demand curve as the one for Coke. The price of the sunset experience is not money. Instead it may be the lost opportunity to do something else, or the added cost and trouble of finding a home that will offer a view of the sunset. (In that case, price and cost are the same because the buyer and the producer are one and the same.) The law of demand will apply nevertheless. The individual will spend some optimum number of minutes per day watching the sunset and will vary that number of minutes inversely with the price of watching. From Individual Demand to Market Demand Thus far we have discussed demand solely in terms of the individual’s behavior. The concept is most useful, however, when applied to whole markets or segments of the population. Market demand is the summation of the quantities demanded by all consumers of a good or service at each and every price during some specified time period. To obtain the market demand for a product, we need to find some way of adding up the wants of the individuals who collectively make up the market. . more information about that quality than do buyers. But in the case of warranties it is the buyer who has crucial information that is difficult for the. away from doing things for which they have recently been punished. When lines for movie tickets become long, some people go elsewhere for entertainment. On