This chapter introduces you to the economics of public policy, and why the government intervenes in some markets. You will also learn that the solution to a market that is producing an undesirable outcome varies widely from industry to industry. | The Economics of Public Policy Slide 14 - What is Chapter 14 about? Slide 14 - What will public policies actually do ? Basic economic principles can help us to understand what the actual results of public policies will be Depends on actual market structure But Economics cannot say what policy results should be Each individual has own social values Slide 14 - I. Public Policy Toward Natural Monopoly Slide 14 - Monopoly Costs of monopoly charges higher prices restricts output imposes dead weight loss on society Hence, many government policies aim to control “natural” monopolies Increasing returns to scale mean that in some industries large firm has inherent advantage Example: electricity distribution, water supply Slide 14 - Government Policy Options Government can: assume ownership & supply directly attempt to regulate the prices charged solicit bids from private firms to provide create competition by breaking firm up Each alternative has its own problems Issue: . | The Economics of Public Policy Slide 14 - What is Chapter 14 about? Slide 14 - What will public policies actually do ? Basic economic principles can help us to understand what the actual results of public policies will be Depends on actual market structure But Economics cannot say what policy results should be Each individual has own social values Slide 14 - I. Public Policy Toward Natural Monopoly Slide 14 - Monopoly Costs of monopoly charges higher prices restricts output imposes dead weight loss on society Hence, many government policies aim to control “natural” monopolies Increasing returns to scale mean that in some industries large firm has inherent advantage Example: electricity distribution, water supply Slide 14 - Government Policy Options Government can: assume ownership & supply directly attempt to regulate the prices charged solicit bids from private firms to provide create competition by breaking firm up Each alternative has its own problems Issue: assess relative cost/benefit in actual context Slide 14 - What is a “Natural Monopoly” ? A natural monopoly exhibits economies of scale Implication: marginal cost will always be less than average cost Setting the price equal to marginal cost Is allocatively efficient But would result in an accounting loss Slide 14 - State Ownership and Management The state could take over a natural monopoly in order to Set price equal to marginal cost Absorb losses out of general tax revenues What’s the incentive for cost cutting? Private sector owners benefit in profits Public sector managers’ behavior will depend on the incentives they face If promotion depends on cost-cutting, same as private If other objectives matter, harder to ensure costs are minimized Slide 14 - State Regulation of Private Monopolies Most common monopolies in Canada are regulated Electric utilities Natural gas providers Local telephone companies Cable television companies Governments use cost-plus regulation .
