CH04 - 500_12489_MyattCanMicro_CH04_83-108 3/4/05 6:04 PM...

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chapter >> HINK BIG , THEN THINK EVEN bigger.” This was Sir William Van Horne’s motto, and he certainly lived by it. Sir William’s vision, ener- gy, and indomitable will were largely respon- sible for the successful completion, in five dramatic years, of the Canadian Pacific Railway. This railway played a fundamental role in the settlement and development of the Canadian West, and became the lifeline that united Canada’s vast territory. Its completion in 1885 fulfilled a dream—the vision of a nation stretching from the Pacific coast to the Atlantic Ocean. Of course, its completion also meant that Van Horne’s pockets were bulging with money. And what better way to spend it than to build a luxury summer residence on his own 500-acre island and become a “gentleman farmer”? So, the self-made millionaire equipped his summer residence with a gigantic livestock barn to house his prized herd of Dutch belt- ed cattle, a creamery where the milk and butter were prepared for consumption, and a heated greenhouse where exotic plants, peach trees, and grape vines were grown. In this way, Sir William was able to provide himself and his guests (there were 17 bedrooms) with fresh milk, butter, fruits, and vegetables. And when he visited his Montreal residence, he had these provi- The Market Strikes Back BIG COUNTRY, SMALL IDEAS 83 4 sions sent to him by overnight rail— Canadian Pacific, naturally. But if you have similar thoughts of becoming a gentleman farmer after you’ve made your nest egg, perhaps you should think again—especially if you actually want to sell your product on the market. While there’s nothing to stop you from making lots of money, government regulations might prevent you from becoming a pro- ducer of turkey, chicken, eggs, milk, butter, or cheese. All these products are protected by “marketing boards”, the main purpose of which is not to “market” the product, but to set a price floor for the producer and to impose quotas to prevent surplus pro- duction. Without a quota—which is an actual piece of paper giving you the right to produce a certain amount of the product— you can’t produce. And since they’re not giving any more away, to obtain the neces- sary quota you might have to pay several Buddy Mays/CORBIS What you will learn in this chapter: The meaning of price controls and quantity controls, two kinds of government intervention in markets How price and quantity controls create problems and make a market inefficient Why economists are often deeply sceptical of these attempts to control markets Who benefits and who loses from market interventions, and why they are used despite their well- known problems What an excise tax is and why its effect is similar to a quantity control Why the deadweight loss of a tax means that its true cost is more than the amount of tax revenue collected The Van Horne mansion, Minister’s Island, New Brunswick: “Think big, then think even bigger”.
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This note was uploaded on 09/04/2008 for the course ECON 541 taught by Professor Cumby during the Fall '08 term at Georgetown.

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CH04 - 500_12489_MyattCanMicro_CH04_83-108 3/4/05 6:04 PM...

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