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1423class2 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± Class 2 1
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Outline • Definitions • Perfect Competition and Economic Surplus • Monopoly and Deadweight Losses • Natural Monopolies • X-inefficiency • Estimates of welfare losses of monopoly • Technological change and Competition • Patents and Copyright 2
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Efficiency and Technical Progress Economic regulations should promote efficiency and technical progress. Efficiency is concerned with optimizing the use of existing resources and technology. Technical progress is conditional on the allocation of resources to develop new technologies. Efficiency is static, technical progress is dynamic. Different types of market structures may impact efficiency and technical progress differently. 3
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Assumptions of Perfect Competition • Consumers perfectly informed. Producers have similar non-increasing returns to scale technologies. Consumers maximize preferences given budget constraints. Producers maximize profits given their production functions. All agents are small in relation to size of market and externalities do not exist. • A competitive equilibrium is then determined. 4
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Properties of an equilibrium under perfect competition Pareto efficiency – exists when it is not possible to improve on the current equilibrium without making at least one consumer worse off. • Price = Marginal Cost • All firms price takers. • There are no super-normal profits. However in practice economic regulation is often concentrated on industries where the assumptions of perfect competition do not hold. • The aim of economic regulation is often to simulate 5 some of the properties of perfect competition.
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Figure 1 - Market supply and demand Consumer surplus (CS) (Area CDB) = P 6 Supply, S Demand, D CS PS the value of market production to consumers Producer surplus (PS) (Area ABD) = the value of market production to producers B F H C D A 0 Q’ Q
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This note was uploaded on 11/18/2011 for the course ECON 14.23 taught by Professor Daronacemoglu during the Fall '09 term at MIT.

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1423class2 - 14.23 Government Regulation of Industry Class...

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