Economics of Antitrust and Regulation ECON 4400

1
Economics of Antitrust and RegulationECON 4400

• Government Response
• to
• Market Failure

2
Policies for Market Failure

• Monopoly
• Antitrust
• Natural monopoly regulation
• Externalities Public Goods
• Regulation
• Government provision
• Imperfect Information
• Regulation
• Doing nothing

3
Social Welfare

• Goal maximize total surplus
• Consumer plus Producer Surplus
• Also called Economic Surplus or Social Welfare
• Perfectly Competitive Markets
• Homogeneous products
• Many buyers and sellers
• Free entry and exit
• Perfect Knowledge (costless information)
• Market Equilibrium Maximizes Total Surplus
• P MC
• Marginal Social Value Marginal Social Cost

4
Market Failure Deadweight Loss

• Failures of real markets to satisfy the
  requirements of perfect competition lead to
  reduced total surplus
• The reduction in total surplus is called the
  deadweight loss
• Quantity may be too low or too high
• Price is not equal to marginal cost
• Government policies may act to reduce this
  deadweight loss
• Losses may also be reduced by private agreements
  or contracting (Coase Theorem)

5
Normative vs. Positive Analysis

• Normative Public Interest Theory
• Policy attempts to reduce DWL
• Balances overall costs and benefits to society
• Seeks optimal solution for market failure
• Positive Interest Group Theories
• Government policies create winners losers
• Interest groups try to influence policy for their
  individual benefit
• Politicians seek to attain personal goals by
  balancing political interests

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Critique of Positive Analysis

• Elected Officials
• Are not perfectly controlled by interest groups
• May follow ideologies
• Regulators/Bureaucrats are not perfectly
  controlled by elected officials
• May seek personal goals, not will of politicians
• Ignores the role of judges and the courts
• Lacks theory for motivation of judges