Unformatted text preview: PADP 8670 POLICY ANALYSIS I Regula(on and Public Provision Angela Fer7g, Ph.D. Overview Regula.on Price Minimum Wage Quan.ty Quotas Ra.oning Public Provision 1 Ra.onale for Price Controls Primarily equity: ensure that poor can afford basic necessi.es Can be efficiency: average cost pricing in the case of a natural monopoly reduces DWL Minimum Wage Wage floor regardless of labor supply and demand Purpose is to reduce poverty among working poor Fair Labor Standards Act of 1938 Since 2009, federal minimum wage=$7.25/hr Full-.me full-year: $7.25*40*50=$14,500/yr Poverty line for family of 4 is $22,350 in 2011 WA: $8.67 in 2011 SF: $9.92 in 2011 Minimum wage, over.me pay, child labor laws Set periodically by Congress at around half average wage Some states/ci.es have higher minimum wages: 2 Implica.on of nominal terms Since the minimum wage is set in nominal terms, the real minimum wage follows a zigzag pa]ern over .me. Real minimum wage is lower than it was throughout 1960s-70s. Pros and Cons Pros: May reduce wage inequality, poverty Government does not pay for it (do not need to cut spending or raise taxes) Higher costs for firms Lower employment DWL Not efficient in achieving goal (helping poor households) Not clear who pays for it Firms may have lower profits Consumers may have higher prices (low wage families are consumers of goods made by minimum wage workers) Low wage workers may lose their jobs or have reduced benefits Cons: 3 Simple case: uniform coverage All firms regardless of size must pay minimum wage 0LD: workers with higher wages LDLS: unemployed LDL0: workers who lost their jobs L0LS: people who entered the LF as unemployed (searching for employment) because higher wage Impact on P & Q of goods Firms marginal costs rise because labor costs rise price rises, output falls 4 Par.al Coverage Current US minimum wage only covers about 85% of jobs (small businesses are exempt) Those unemployed in the covered sector may seek employment in the uncovered sector reduced wages in uncovered sector Impact on P & G of goods Goods in covered sector: prices will rise, output will fall (as in uniform coverage case) Goods in uncovered sector: MC falls, prices fall, output rises 5 Empirical Evidence Small adverse employment effects Mostly on teenagers: 10% increase in wage leads to 2% drop in employment. Small effects on income distribu.on Minimum wage affects low wage workers, not necessarily low income families Reasons for small effects: Compliance is low: about 40% cheat (sweat-shops, etc.) Firms can reduce non-wage compensa.on Only 2 million people earn the minimum wage (about 3% of hourly workers) Quan.ty Controls Ra.onales: Efficiency: To limit the produc.on or consump.on of goods with nega.ve externali.es Redistribu.on/Equity: Import quotas redistribute surplus from consumers to producers in industries that are not globally compe..ve Ra.oning ensures that
it is affordable for everyone to have a minimum amount of a necessity 6 P Import Quotas S(domes.c) A B D E F Quota S(domes.c)+Imports G D(domes.c) P(quota) World Price C H Qs Qs(q) Qd(q) Qd Q Redistribu.on but deadweight loss Before Quota AAer Quota CS A through G A+B PS H C+H License Holder None E+F Surplus TS A through H A+B+C+E+F+H Change -C-D-E-F-G +C +E+F -D-G Redistribu.on: DWL CS falls PS rises License Holders are domes.c firms that import at the world price and sell at the US price 7 Gasoline ra.oning In 1973, OPEC ordered oil embargo restric.ng the short-run supply dras.cally. The US's first response was to freeze the price of gas to the pre-embargo price That created a shortage and long lines (ra.oning through wai.ng .me) Difficult to know if gasoline was distributed efficiently; poor had lower opportunity costs of .me, but rich could pay others to wait in line Graph of price freeze shortage 8 Ra.oning transferable coupons would have been be]er response Each licensed vehicle receives coupons which allow them to buy their allo]ed amount of gas. If they don't need the gas, they can sell the coupons to someone else. The demand curve shios back (people are restricted from buying unless they have a coupon) and becomes ver.cal at total number of coupons issued. Price is determined by intersec.on of demand and supply. Benefits: No shortage so no lines as gas sta.ons People are encouraged to conserve Distribu.on of gas is efficient Graph of transferable coupon 9 Another example of ra.oning: Oregon Health Plan In 1994, Oregon Health Plan took effect: Created priori.zed list of health services by effec.veness Medicaid expanded to cover more, but services were ra.oned by list In 2007, funding allowed trea.ng condi.ons ranked above 531 (out of 710 condi.ons) Evidence suggests that overall health in state is be]er as a result of ra.oning Public Provision Ra.onale: Free-rider problem: private sector does not want to provide public goods because they are non-excludable (can't make people pay for them) Govt can compel payment through taxa.on Contrac.ng out provision of good or service to private firm is best if: 1. good or service is clearly defined 2. quality of good or service is easily observed and measured Public provision vs. public financing & private provision: 10 Example 1 Contrac.ng out a private firm to build a highway is preferred because: Can specify details: kind of pavement, safety features, .meline Quality if observable and measurable Costs can be low because private firm has incen.ve to profit maximize, keeping costs low, offering low bid Compe..on among firms can also lead to be]er quality & more innova.on than if build by government employees (incen.ves are low to innovate, cut costs, finish on .me) Example 2 Public provision of public safety is necessary; cannot contract out because: Difficult to specify task: How many patrol cars? How long should a crime be inves.gated before giving up? How much effort should be devoted to crime preven.on? Contract would be complicated and likely would miss something How many patrol cars at midnight? How hard did detec.ves try to solve crime? Difficult to monitor private firm's ac.vi.es: Difficult to measure outcomes a]ributed to private firm's efforts/quality: If crime rate decreased, is it because of firm or rising incomes? If crime rate increased, is it because of drug epidemic or firm? If arrest targets given, firm may have incen.ve to arrest innocent people. Cuqng costs may create the wrong incen.ves for the firm. 11 Problems with Public Provision Public producers are ooen monopolists, not subject to compe..on from other suppliers, which could lead to inefficient outcomes Public bureaucrats have an incen.ve to budget-maximize, producing too much output (inefficient level) Legislature does not know cost curves of agency so will accept any budget below the public's benefit Budget Maximizing Bureau graph 12 Why budget-maximizing bureau model may not empirically hold Most bureaucrats behave in a socially responsible way; only a few exploit their posi.on Legislature may know more about cost curves than model assumes (because of OMB, GAO, disclosure, etc.) Tiebout model: bureaucrats face compe..on from other municipali.es and can "vote with their feet" Tiebout Model Communi.es offer a bundle of services at a price (tax rate). If people are mobile, they will move around un.l they find a community that maximizes their u.lity. Thus, communi.es have an incen.ve to compete with each other to provide the best services at the lowest prices to a]ract tax- paying residents. 13 Example: Public Schools Tiebout model predicts: Public schools are subject to compe..on from neighboring locali.es Budget-maximizing bureau model predicts: public school bureaucrats have incen.ve to maximize budgets and do not have incen.ve to lower costs because legislature/ci.zens cannot observe cost curves 14 ...
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- Fall '10