Class Notes - Introduction to Economic Concepts PDF

**Class 1:** **Intro + Key economic concepts** - **Opportunity Cost:** The Value of the best forgone alternative - The OC of X is the amount of Y given up to get X, where Y is the best alternative to X - Units of measurement - OC exludes sunk costs, includes cost...

**Class 1:** **Intro + Key economic concepts** - **Opportunity Cost:** The Value of the best forgone alternative - The OC of X is the amount of Y given up to get X, where Y is the best alternative to X - Units of measurement - OC exludes sunk costs, includes cost for which there is no observed outlay (Free on-street parking, uni degree, Jericho Garrison) - **Marginalist Principle**: - Any policy should be carried out as long as the MB \> MC - Most Activities are subject to diminishing marginal benefits and rising marginal costs - If a scare resource has more than one potential use, then is should be divided among those usages such that the MB = MB - Don't ask "how many," ask "How many more till no more?" - Ex: Bike lanes in Vancouver (first few provided greater MB, but the subsequent lanes generated less MB for the same or more MC ) - Equating Marginal Benefits - **Incentives Effects** -- Individuals respond to economic incentives, - Policies may have unintended consequences because they alter the incentives of individuals - **Demand, Supply, Elasticity** - **Government Policy** - What should the role of government be? (Normative or prescriptive) - Fairness, Equity, Efficiency, Ethics - What factors explain the actual conduct of government? (Positive or descriptive) **Key Learning Points of Class 1:** - **Use opportunity costs, not accounting costs when evaluating policies.** - **It\'s not "all or nothing": expand beneficial policies up to the point where marginal benefits equal marginal (opportunity) costs. (Requires estimates of MC and MB.)** - **Well-intended policies can have undesired impacts, often because of failure to consider incentive effects.** - **Even attempts to use incentives can go wrong.** - **However, many well-intended policies do work because the unintended consequences are small or even negligible.** **Class 2: Market Efficiency:** - **Market Economies: (individualism)** - Prices are determined by supply and demand - Demand represents aggregate preferences of consumers - Goods are supplied by individuals/firms pursuing profitable opportunities -- voluntary - Government intervention must be justified case by case - Under socialism, GI is the normal state, and market interactions are the exception. - **Economic Freedom** - consenting adults can engage in mutually advantageous transactions - **Consumer Sovereignty** -- consumers are ultimately the ones to determine what will be made and sold and consumed, based on own preferences - What you think vs what you do - There will be infringements (vaccine mandates) - **Private Enterprise** - Private incentives at different stages of production lead to decision that appear coordinated (Milton Freedman) - "If an exchange between two parties is voluntary, it will not take place unless they both believe they can benefit from it." (Adam smith and invisible hand) - Flaws with interpretation: need Government policy/intervention to protect from market failures and to enforce competition - **Efficiency -- "getting the most out of what you put in."** - Two Types of efficiency: - Production/management efficiency -- Output being produced at lowest input/cost - Pareto Efficiency -- appropriate amount of each good is produced - Attained when it is impossible to reallocate resources among a group of people in such a way as to make at least one person better off without making anybody else worse off. - No DWL - Pareto improvement -- when at least one person is made better off while no one is made worse off - A potential Pareto Improvement - re-allocation of resources could allow for those individuals who are net gainers to fully compensate the net losers, - **Perfect competition:** - Large number of sellers and buyers in the market (no single buyer/seller can influence the price) - Identical products - Free entry and exit - Perfect knowledge of opportunities for profitable exchange - **First Theorem of Welfare economics:** - Under PC, markets achieve PE (All mutually beneficial transactions have been accomplished) - **Government Interventions in competitive markets:** - Minimum wage (w' \> w^c^) (current wage lower than demanded wage) - Rent control (r' \< r^c^) (rent is higher than demanded) - A sales tax to pay for social services - A government subsidy paid to sellers for each unit sold **Key Learning Points of Class 2:** - *Competitive* markets generate Pareto efficiency - Governments may choose to tolerate some inefficiency to achieve equity objectives. - However, to make good policy, we need to understand the trade-offs. - Economic tools can help us understand these tradeoffs. - But "economics" has a lot more to say on these tradeoffs. Next time: market failures **Class 3: Market Failure:** - Imperfect Competition -- where the criteria for PC is broken (individuals have influence over price/barriers to entry) Sellers or buyers have market power - **Monopoly**: markets with a single seller. - **Cartels**: multiple sellers who collude on price. - **Oligopoly**: a small number of sellers compete, recognizing they are large enough to affect the price. - **Monopolistic competition**: a large number of sellers of (typically) differentiated varieties of a product. - **Monopsony**: markets where there is a single buyer. - Leads to prices that are lower than competitive equilibrium - Labour market (worker as supplier, employers are buyers) -- min wage - **Asymmetric Information** -- when the seller knows product characteristics that the buyer does not know - Search Goods - Consumer learns the quality by inspecting at the place of purchase - Experience Goods - Consumer learns quality after first purchase and consumption (Foods) - Credence Goods - Consumer is never sure of quality of service, or at least not until too late. (Safety Helmets) - With Asymmetric info of search and experience goods, consumers respond in low cost, effective ways - Credence requires certification of products or services to validate the good - **Public Goods** -- goods that are meant for everyone and do not have property rights (Parks, lighthouses) - **Non-rival**: the benefits obtained by one consumer are not subtracted from benefits available to others. (Others may consume) - **Non-excludable:** it is prohibitively costly to selectively prevent people from using it (impossible or costly to exclude someone from using it) - **4 types of Goods:** - Private - Market - Club- Market - Public - Common -discussed later - Externalities - Problems with market failure: - With **Key Learning Points of Class 3:** - **Market economies (private enterprise + limited gov't) are preferred to state-directed socialism for several reasons:\ \ -Countries with *extreme* centrally-planned economic systems have performed poorly. Most have abandoned the system.\ \ -Adam's Smith "invisible hand" argument is powerful. Economists have formalized this in the First Welfare Theorem.\ \ -Deviations from competitive equilibrium lead to deadweight loss.** **What we've done so far:** - **learned the good properties of competitive markets** - **seen how four types of market failure can mess things up** **What we need to do in rest of course:** - **Consider policy goals other than efficiency.** - **Consider the role of business ethics in the presence of market failure.** - **Analyze government policy in substantive areas subject to the four market failures.** **Class 4: Fairness** - **Distributive Fairness**: Final allocation of Benefits across individuals is just or morally acceptable - **Egalitarian**: Divide Wealth Equally - **Utilitarian:** Maximize Sum of Utilities - **Procedural Fairness**: "rules of the game" are just morally acceptable, regardless of the final allocation that results - Footraces, equal distance - **Fairness vs Efficiency Trade-offs** - Distributional fairness often come at a cost of reduced efficiency: - Rent Control Benefit Buyers, but lead to DWL - Removes incentives - **Individual Fairness** -- Treated fairly in Terms of Procedures or outcomes - **Group Fairness** -- Treatment of larger groups based on gender, race, ethnicity, or other characteristics - Quotas for certain races at universities - Salary Increases for women due to historical lower salaries than males **Key Learning Points of Class 4:** - Perceptions of fairness are important to all of us. - Context matters: We think unfair behaviour is obvious but perceptions can be shaped by how decisions are framed. - There are often efficiency losses from pursuing fairness goals -- and that\'s ok, up to a point. - Counterexample: getting rid of market power generally promotes fairness *and* efficiency. - There can be a trade-off (or conflict) between individual and group fairness **Class 5 & 6: Ethics:** - **Ethics** is the study of moral judgements about the good or right of actions and of rules of behaviour - Moral Philosophy is concerned with absolute principles and rules - Moral relativism - 3 ethical theories - **Utilitarianism** -- aggregation of cost/benefits. Does not necessarily mean serving the majority, but merely that total benefit is greater than total cost - Ex: One dollar for rich person vs one dollar for homeless person (Utility) - **Act Utilitarianism**: Each individual action is assessed - **Rule Utilitarianism**: Individuals choose a rule presuming that this rule will be obeyed by all - Ex: Bribing a guard to let you bring live saving medicine (Act says okay, Rule says no) - Weakness: Difficulty of calculating net benefits, Ends justify the means - **Kant's moral rules** -- non-consequentialist, the goodness of an act should not be determined by its consequences, but instead based on other factors - Categorical Imperative, 1^st^ formulation: Act according to rules that are universalizable - 2^nd^ formulation: Do not treat people purely as a means to an end - Is it logically possible for everyone to act this way - Would I want everyone to act in this way - **John Rawls' Theory of Justice** - **Original Position** -- individuals have knowledge of nature, the economy, behaviour, but no one knows their own position in life (Veil of ignorance) - Contract -- Those in the original position must reach a unanimous decision on the rules of society - Claims that would arise - Equal Liberty - Fair Equality of Opportunity - Difference Principle (Maximizing the worse off -- 1 dollar to homeless vs 1000 dollars each to random people) - 2 classifications - **Teleological (consequentialism**): Consequences of actions is the most important (Greater good) - Utilitarianism - **Deontological**: Moral right takes precedence over the good and can be judged independently of consequences -- Kant's Theory of moral rules/Rawls social contract **Key Learning Points of Class 5-6:** - Do not make self-serving moral exceptions - Be aware of rationalizing, self-serving behaviour - Generally speaking, take actions that add to the sum of human happiness (utilitarianism) - However: respect the individual autonomy of others - When you find these principles in conflict: - Consider carefully, have a clear basis for your decision - Follow your moral instincts - Ask advice of trusted third party **Class 7: Corporate Social Responsibility:** **Learning Objectives:** **Outline Friedman's argument (and rebuttal arguments) that the social responsibility of business is to maximize profits\ \ Discuss the four responses to market failures, in particular the role of ethics** - Milton Friedman: "\"There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud\". - Corporate executives who are the agents of shareholders - Social Responsibility are actions that conflict with the interests of the owners of the business (conflict with profit maximization) - "Taxation without representation" - **Corporate activity that aims to help society that conflicts with Profit Maximization is:** - **Conflicting with profit maximization (\"taxation without representation")** - 1\. **unfair and undemocratic** because these decisions should be made through a democratic process (the political system) - 2\. **unwise because a businessperson** has no expertise to identify and fix social problems. - 3\. **ineffective because a manager** that acts contrary to profit maximization might be fired and have customers desert to a less scrupulous firm due to competitive forces - "Survival Principle" need to profit max for the survival of company - Pushback as the shareholders and consumers may endorse the firm's goal - Firms may know more about its products and processes than legislators or government regulators - shareholders and consumers endorse the firm\'s goal. - Kenneth Arrows Response to Friedman - Market Failures which profit maximization fails to yield efficient results - Negative Externalities (Pollution) - Asymmetric Information (Firms know much than the consumer) - Policy Solutions (Argued by Friedman to address market failures, but these policies focus on efficiency, rather than fairness) - **Regulation** (Safety/Environmental Standards) - Limitation: Difficult to make flexible yet enforceable/delays/costly - **Taxes** (Tax Externalities) - Limitation: above/does not correct informational asymmetries - **Legal Sanctions** (Legal Liability or Tort System) - Limitation: difficult to establish guilt/litigation slow and costly - Rather than employ public policies, socially responsible actions of managers is more desirable through - **Codes of ethics** -- a set of official standards of conduct that the members of an organization are expected to uphold - Best practices to follow for honesty, integrity, and professionalism - Violating the code of ethics can result in sanctions, including termination - Ethical codes help fill in the gap where legal solutions are inadequate - Enforcement by informal institutions: - Peer Pressure/Whistle Blowing **Key Learning Points of Class 7:** - **Friedman helped the debate by standing up against a form of "mindless" social responsibility.** - **Some policy problems are better left to the democratic process and government action (regulation, taxation, tort system).** - **Arrow\'s middle view has merit: markets & governments don\'t always get things right or are too slow to act. Ethics can help.** **Class 8: Politics** **Learning Objectives:** **We will consider two forces driving government decision-making in this lecture:** 1. **properties of voting and electoral systems** 2. **interest group activity** **A third source is direct self-interest of bureaucrats and/or politicians** - **Political Economy**: policies are intended to promote efficiency and welfare (Reaching pareto efficient) - Not Obvious how we should combine the different preferences of people in society to make policy - Influenced by special interest groups and self interest, leading to choices different than those that promote the public interest (Politicians focusing on reflection) - Efficiency vs fairness, policymakers may be influenced by special interest groups and self-interest - **Direct Democracy**: direct voting by individual citizens (May not have experience to know what is best for them) also expensive - **Representative democracy**: voting for delegates who represent the interests of individuals they represent - Voting does an imperfect job of **revealing aggregate preferences** (intensity of individual) - Hotelling Model: 2 party systems will gravitate towards the centre - Implications: - Little difference in substance between major parties - Overall policy platform will closely match the preferences of the median voter - There could be opportunity for a third part to enter and grab substantial votes - Not accurate for modern politics due to - Parties playing to their base (policies intended for their side) - Voter distribution is not equal distribution - Voter turnout (might not come unless playing to their base) - **Condorcet Paradox** -- there is no clear favourite in voting depending on the order of agenda and who is voting first (x vs y, y vs z, z vs x) - Preference intensity: **Vote Trading** -- gaining support for issues they care deeply about at the expense of issues not important to them - Types of Electoral Systems: - **Majoritarian system --** Requires 50% of the total votes and if not able to, may require a second round of voting - Alternative Vote System -- ranking first and second choice, - Australia - Run off system -- second round of voting with less candidates - **Plurality System** -- Winning candidates receives more votes than any other candidate (Canada's first past the post") - **Proportional System** -- allocation of seats is based on vote a party receives and the number of candidates it elects (Europe and South America) - Issues with Plurality -- **Dominated Winner Paradox** - Liberal Gets more seats (51%) but NDP gets more votes, but due only lost due to marginal ridings **Voting Summary**: - **Voters may not have the expertise to make well informed judgements on every issue.** - **Votes do not convey intensity of preferences of individual voters.** - **While voting seems like a \"fair\" process, different voting schemes can yield different outcomes.** - **The current plurality system in Canada tends to lead to majority governments but under-representation of minority political parties.** **Interest Groups:** - **special interest groups:** small coalitions advocating a specific policy or viewpoint to elected delegates: Two Types - Economic Interest Groups - Social Interest Groups - **Rent Seeking**: using resources to redistribute wealth from others, rather than create wealth (Lobbying could be argued as a form of rent seeking) - Consequences: - **Resources consumed in rent-seeking are wasted** - **There is a transfer of wealth to the rent seeker** - **The policy induced by rent seeking usually has a pure waste associated with it.** - **Special Interest Groups may be just** - exist for rent-seeking purposes (negative view) - they convey useful information (intensity of preferences, technical information) **Key Learning Points of Class 9:** - **Positive theory of government describes how policies come to be chosen.** - **We discussed two mechanisms:** 1. **Properties of voting: many outcomes possible** 2. **Interest group activity: may convey useful information but also reflects rent seeking.** **Class 9: Indigenous Business Issues:** Basic history of land title and treaties in BC: - **Royal Proclamation of 1763** - To combat the frauds and abuses which settlers have committed against the Indigenous People, only the crown may purchase lands from the Indians. This is where Aboriginal title was coined - **Constitution Act 1982:** - Aboriginal rights are protected under s.35 of the constitution act 1982. This includes practices such as hunting, fishing, gathering, as well as aboriginal title, which is a right of ownership and governance over lands that the first nation used and controlled - **Honour of the Crown:** - Where there is treaty, the crown must uphold its obligations with honour, and where there is no treaty, common law dictates that the Crown must consult and accommodate indigenous Nations - Aboriginal Rights did not exist till the Calder decision in 1973 - **Duty to consult and accommodate** - Based on the Honour of the crown - The duty to consult exists on a spectrum - **UNDRIP: "United Nations Declaration on the Rights of Indigenous Peoples"** - Obtain their free and informed consent prior to the approval of any project affecting their lands - Canada echoed in the Truth and Reconciliation commission of Canada - **DRIPA: " Declaration on the Rights of Indigenous Peoples Act"** - a\) to affirm the application of the Declaration to the laws of British Columbia; - b\) to contribute to the implementation of the Declaration; - c\) to support the affirmation of, and develop relationships with, indigenous governing bodies - Requires Province develop an action plan in consultation with indigenous nations - **free, prior, informed consent (FPIC).** - a requirement for provinces to obtain consent from Indigenous Peoples before implementing measures that may affect them. Supported by UNDRIP **Haida case involving Tree Farm License 39 and its role in interpreting the duty to consult** - BC issued a Tree Farm License to a forestry firm in 1961, permitting it access to harvest trees of the Haida Gawii. In 1999, the Minister approved a transfer of TFL to a different firm, and the Haida nation challenged as the transfer was made without its consent and without consulting and accommodating its asserted rights and title **Minerals Tenure Act case interpreting DRIPA. (First Case):** - The Gitxaala and Ehattesaht Nations challenged the Mineral Tenure Act on the basis that it: - contravenes the Crown's duty to consult with Indigenous Nations and - Fails to acquire their free, prior, and informed consent, as required by UNDRIP and affirmed in DRIPA, before granting mineral tenures. - First Case in BC to interpret and apply DRIPA: the court decided that: - The Crown (BC) has failed to uphold its constitutional duty to consult Indigenous Nations when granting mineral claims under the MTA. The legislation complies with the Constitution Act 1982, it is BC's application of the legislation that was unlawful. - The Court granted the Province 18 months to consult with Indigenous Peoples and modernize the mineral tenure system in a way that accounts for the Crown's duty to consult - The Court declined Gitxaala and Ehattesaht's requests for injunctions barring the registration of further minerals in their territories and declined to cancel any current tenures. - The Court also held that DRIPA does not implement UNDRIP into the domestic law of B.C., and DRIPA does not require the court to interpret whether the laws of B.C. are "consistent" with UNDRIP. **Class 10: Environmental Policy \#1:** - **Externality** -- non-priced effect on the welfare of one agent in the economy resulting from the activities of another agent (Ex: Pollution, global warming, ozone depletion, standards) - **Effects of Negative Externalities**: - Activites with negative externalities will be carried out at a level that is too high from the social point of view (socially optimal level is usually greater than 0) - **Pollution Abatement** -- positive externalities (carbon tax, subsidies) Reduce in pollution - **The Coase Theorem:** With well-defined property rights and negligible transaction costs, Pareto efficiency can be achieved through private negotiation, regardless of how the property rights are initially allocated. Environmental Policy Effects: - **Scale Effect** - Policy *reduces the volume* of the pollution-intensive economic activity - **Technique Effect** - Policy induces a shift to a *less-polluting technology* - **Composition Effect** - Policy *shifts economic activity* from a pollution-intensive activity/industry to a less-pollution intensive activity/industry - **Extensive/Intensive Margins** - Intensity of use: Related to consumption decisions - Extensive: Related to investment decisions (subsidies) Dimensions of Policy Choice: - Efficiency - **equi-marginal principle**: the cost of abatement of the next unit of pollution is just equal to the marginal damage. (SMC = SMB For abatement) - **Implication: All firms abate up to the same marginal abatement cost, but this occurs at different levels of abatement for each firm, depending on MAC curve** - Fairness - **How should the burden of policy be distributed?** - Income Progressive/Regressive - Environmental Policy - An effective environmental policy is one that can be relied upon to reduce emissions significantly. Does the policy... - Political Feasibility (Urgency, Invisibility, Uniformity, Cost, Safety/Simplicity) **Key Learning Points of Class 10:** - **Negative externalities result in too much of an activity. This is economically inefficient.** - **The source of the externality problem is incomplete property rights and transaction costs.** - **The analysis of externalities applies to a variety of environmental and other policy issues, including local air, water, and soil pollution; climate change; congestion; and vaccine and non-pharmaceutical interventions for infectious diseases.** - **Policy options must address efficiency, fairness, dependability, and political feasibility.** **Class 11: Environmental Policy \#2** - Policy Solutions: - Voluntary Solutions - Third-party audits and ecolabels - Command and Control - Quantity controls or standards - Market-based Solutions - Taxes and Tradable Permits - Standards (Command and Control): - Government agencies decide on a level of discharge and then require that firms meet the standard. - Emission standards for automobiles - Low Carbon Fuel Standards - Pulp mill chlorine & phosphorous compound emissions performance standards - Firms respond by curtailing pollution-producing activities or installing pollution-abatement devices. - "Flex regs" typically preferred to tech requirements - Taxes (Market-based Standards) - The government may choose to tax the activity - Gasoline is heavily taxed - BC instituted a carbon tax in 2008 - Currently set at \$80/tonne of CO2e - The federal government has imposed a carbon tax in provinces that do not have their own carbon pricing system (the "federal backstop") - Currently \$80/tonne - Set to increase to \$170/tonne by 2030. - Tradeable Permits: - With tradable permits, the government sets the quantity of emissions rather than the price of emissions. - Firms in the regulated industries then bid on the permits (and can also sell them in a secondary market). - This auction + secondary market determines the equilibrium price of a permit.  - Taxes vs Trade - Both provide incentives to firms to reduce pollution, and both can achieve a given level of aggregate pollution abatement at lowest economic cost. - Tradable permits assure that aggregate pollution not exceed a stipulated level. ("[cap] and trade") - Taxes provide firms with more cost certainty. - Is it most important to hit our targets or give firms cost-certainty? **Key Learning Points of Class 11:** - Negative externalities result in too much of an activity and create inefficiency (DWL) - The source of the externality problem is incomplete property rights and transaction costs. - Market-based solutions (taxes, tradable permits) are preferred to standards when agents have different abilities to reduce the negative externality. - Climate change is a serious environmental issue with large economic consequences - Pollution pricing has worked in the past and is working now - However, collective action and multiple jurisdictions complicate the policy response **Class 12: Natural Resources Management:** **Goals with this lecture:** - Based on reading Brander Chapter 9.1-9.3.3, and attending this lecture, students should: - understand the Renewable Resource Dynamics figures - (Brander p. 229 & 231) - be able to discuss causes and consequences of the "open access" problem (with examples)---and possible solutions - be familiar with issues related to non-renewable resource depletion - Hartwick's Rule - **Logistic Growth** - Stock of population given by *S* - Growth, *G*, describes how stock of population grows over time (*G = dS/dt*) - Growth depends on the current population stock, *S*, and parameters: "intrinsic growth rate," *r*; "carrying capacity," *K*. - *G(S) = rS(1 − S/K)* is a parabola.\ Growth rate is low when population is very low and very high - Growth is zero when *S = 0* or *S = K\ *Growth is maximized when *S = K/2 (= M in the figure)*  - *H* is harvest rate: - When *H \< G*, the harvest is below growth, so stock increases. - When *H \> G*, the harvest is above growth, so stock decreases. - The stock is in a steady state when *H = G*. - For harvests below H\_2, such as H\_1, there are two steady states: - S\_H is a stable steady state ("bottom of bowl"). - S\_L is an unstable steady state ("top of bowl"). - Key Lessons: - With renewables, sustaining the resource is possible, but requires careful management. - If harvests remain persistently over the "tipping point" the resource stock will collapse (as seen with Grand Banks cod). - Exercise caution: stocks are hard to measure, harvests hard to control. Keep H ≪ G-bar and S ≫ M - With controlled access, stocks will be kept safely above K/2 - Open Access Problem: - Renewable resource management is hard enough when the government controls the harvest. - For open-access (or "common pool") resources, we face the "tragedy of the commons." - [Without property rights], holding back on one's own harvest does not help you, since the stock will be harvested by others. - Open-access problem is most severe: - when no government has control over area: seas past 200 miles, atmosphere. - in countries with inadequate institutions: rainforests in Brazil and Madagascar (lost 90% of its forest). - Requires strong government institutions - International agreements - Allocations, enforcement, and communication - Documented that often local "insider" groups can sustainably manage resources with rules and norms, without the need for private property rights or central command. - Requires shared cultural norms, collective punishment of rule-breakers. - For non-renwable resources, utilize Hartwick's Rule: *Invest all the surplus profits generated by resource extraction into various forms of capital* - The goal of Hartwick\'s Rule is to maintain citizens' quality of life when natural resources are exhausted (inter-gen equality) - Norway\'s Government Pension Fund Global is funded by Norway\'s oil export revenues. In 2024 it is worth \$270,000 *per Norwegian citizen* (about \$1.5 trillion assets under management). - Alberta Heritage Savings Trust Fund has just \$22bn, or about \$4,600 per person. - Alberta's provincial budget is highly dependent on resource revenues despite calls for "de-linkage". Class 13: International Trade Policy: - Comparative Advantage -- if the opportunity cost of producing more X is lower in that country than other countries - Relative Strengths and generally stems from factors used in production (resources, labour, machinery) - Autarky -- economic independence (The point of production if no foreign supply) - -  Decreasing Average Costs (economies of scales) Increased Competition and Choice: - Reducing trade barriers exposes domestic producers to foreign competition. - **In imperfectly competitive markets** (e.g., monopoly; oligopoly), **greater competition will** reduce prices, increase consumer surplus, and **reduce deadweight loss**. - Foreign competition can also provide **more variety** of choices to consumers, which may be directly beneficial independent of price effects. Import Restricting Policies: 1. Tariffs: taxes on imports (and rarely on exports) 2. Quotas: a fixed limit on the quantity of imports 3. Preferential government procurement (e.g. "Buy America" or "Buy Canada" policies) 4. Administrative barriers ("red tape"): forms and procedures at customs 5. Other import-discriminating regulations ("disguised protection"): can include consumer health and safety regulations and technical standards. Trade Policies under perfect competition: Under perfect competition, tariffs and quotas reduce welfare and redistribute wealth. [Assumptions] Domestic supply upward sloping Foreign supply curve flat at international price (small importing country assumption) [Results] Tariff raises domestic price, lowers imports, raises domestic sales and government revenue, lowers domestic welfare Normative rationales for trade policy: 1. Revenue: minimal today (Trump argument) 2. Non-economic: national defense, culture 3. Exploiting market power 4. Infant industry protection 5. Shifting profits from foreign firms 6. Domestic redistribution 7. Increasing employment? (Likely not) 8. Improving trade balance? (Likely not) **Class 14: Competition Policy:** - The stated purpose of competition policy is to \"**maintain and encourage competition** in Canada in order to...ensure that small and medium-sized businesses have an **equitable opportunity**...and to **provide consumers with competitive prices and product choices**.\" - Most operations and investigations are carried out by the **Competition Bureau**. - 2 General Classes of business practices that constitute violations of competition law: - Criminal Code Violations: results of investigations are communicated to the **Attorney General** for prosecution. - Civil Code Violations: adjudicated by **Competition Tribunal** (composed of not more than four judges and not more than eight lay members appointed to seven year terms). - Burden of proof is higher in criminal cases (reasonable doubt vs balance of probabilities - Competition Policy Area of Focus: - Prevent firms from **colluding** (acting as a cartel) by fixing prices or entering into other anti competitive arrangements.\ -Criminal Law - Concerns agreements between competitors, e.g. price-fixing, [bid-rigging](http://mmprodnt.ic.gc.ca/mmpub/competitionbureau/2015/ops3928/Bidrigger-e.mp4), market sharing. - The motives of conspiracies are the pursuit of monopoly profits. - The current law technically allows the court to \"infer the existence of conspiracy with or without direct evidence of communication\..." - However, prosecutions usually involve *evidence of formal agreement*. Conscious parallelism (matching competitor's price, service levels) is not illegal. - Prevent undue reductions in competition arising from **mergers**.\ -Civil Law - Prevent firms with significant market power from **abusing dominant position\ **-Civil Law - The abuse of dominant position sections of the Competition Act may apply when dominant firm or firms engage in anti-competitive acts. - The anti-competitive acts must substantially lessen competition or be likely to do so. - This can happen when anti-competitive acts eliminate a rival or prevent a potential rival\'s entry into a market. - Includes practices such as predatory pricing, exclusive dealing, minimum resale prices. - Prevent **misleading advertising** and other **deceptive marketing practices.\ **-Criminal and Civil Law