Ch14 - CHAPTER 1 4 Regulation and Antitrust Law After...

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Regulation and Antitrust Law CHAPTER 14
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After studying this chapter you will be able to Explain the economic theory of government and how government activity arises from market failure and redistribution Define regulation and antitrust law and distinguish between the social interest and capture theories of regulation Explain how regulation and deregulation affect prices, outputs, profits, and the distribution of the gains from trade Describe the antitrust laws and review three of today’s antitrust policy debates
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Social Interest or Special Interests? Natural monopoly is regulated. But does regulation work in the interest of all—the social interest—or in the interest of the regulated—special interests? Antitrust law restricts the actions of monopolies and blocks mergers. Do these laws serve the social interest or special interests?
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The Economic Theory of Government The economic theory of government explains the purpose of governments, the economic choices that governments make, and the consequences of those choices. Governments exist for two main economic reasons: 1. To establish property rights and set the rules for the redistribution of income and wealth. 2. To provide a nonmarket mechanism for allocating scarce resources when the market economy results in inefficiency—a situation called a market failure .
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The Economic Theory of Government Governments and public choices deal with five economic problems: Monopoly and oligopoly regulation Externalities regulation The provision of public goods The use of common resources Income redistribution
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The Economic Theory of Government Monopoly and Oligopoly Regulation Monopoly and oligopoly, and the rent seeking to which they give rise, prevent the allocation of resources from being efficient and redistribute the consumer surplus to producers. Governments regulate monopoly and oligopoly and enact antitrust laws that prevent cartels and other restriction on competition.
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The Economic Theory of Government Externalities Regulation External costs and external benefits are consequences of an economic transaction between two parties that are borne or enjoyed by a third party. A chemical factory that dumps waste into a river that kills the fish downstream imposes an external cost . A bank that builds a beautiful office building creates an external benefit . External costs and external benefits prevent the market allocation of resources from being efficient.
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The Economic Theory of Government Provision of Public Goods A public good is a good that is consumed by everyone and from which no one can be excluded Examples are national defense, law and order, and sewage and waste disposal services. The market economy underproduces these goods because it is impossible to exclude those who choose not to pay from enjoying them—called the free-rider problem .
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The Economic Theory of Government The Use of Common Resources Some resources are owned by no one and used by everyone. Examples are fish in the ocean and the lakes and
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Ch14 - CHAPTER 1 4 Regulation and Antitrust Law After...

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