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					Price             COBWEB MODEL
 80
                SUPPOSE PRICE IS ABOVE EQUILIBRIUM
 70             PRICE. QUANTITY SUPPLIED IS GREATER
 60             THAN QUANTITY DEMANDED.

 50                         Ao
                           x
 40
 30
 20
 10
  0
      0          5          10         15             20
          CHEMICALS (millions of pounds/year)
Price             COBWEB MODEL
 80
 70              A price above equilibrium causes the producers
 60              to provide a higher quantity supplied than what
                 is demanded.
 50                             Ao
 40                                      A1
 30
 20
 10
  0
      0           5             10              15             20
          CHEMICALS (millions of pounds/year)
Price             COBWEB MODEL
 80
 70
 60
 50                      Ao
 40                               A1 Such a high quantity
                                     supplied means that
 30                            A2    prices fall, as indicated
 20                                  by the demand curve

 10
  0
      0          5        10              15             20
          CHEMICALS (millions of pounds/year)
Price              COBWEB MODEL
 80
 70
 60
 50                            Ao
 40                                       A1
                      A3
 30                                  A2
 20           Such a low price means that Chemical
              firms cut back production.
 10
  0
      0           5             10             15    20
          CHEMICALS (millions of pounds/year)
Price              COBWEB MODEL
 80
 70
 60
                         Bo
 50                            Ao
 40                                       A1
                      A3
 30                                  A2
 20           Such little supply means that
              the price rises to the amount
 10
              indicated on the demand curve
  0
      0           5             10             15   20
          CHEMICALS (millions of pounds/year)
Price             COBWEB MODEL
 80
 70              With such a high price, the quantity supplied
                 rises.
 60
                        Bo
 50                            Ao                    B1
 40                                       A1
                      A3
 30                                  A2
 20
 10
  0
      0          5              10              15               20
          CHEMICALS (millions of pounds/year)
Price             COBWEB MODEL
 80
                     With so much supply, price falls
 70
 60
                         Bo
 50                             Ao                      B1
 40                                        A1
                      A3
 30                                   A2
 20
 10                                              B2
  0
      0          5               10              15          20
          CHEMICALS (millions of pounds/year)
Price                  COBWEB MODEL
 80
 70
 60
                             Bo
 50                                Ao                    B1
 40                                           A1
                           A3
 30                                      A2
 20
 10       B3 Such a low price provides no incentive B2
             to produce any product at all.
  0
      0                5            10             15         20
          CHEMICALS (millions of pounds/year)
WHAT PREVENTS THE UNSTABLE CYCLE?
- MORE INELASTIC SUPPLY
- A LONG TIME HORIZON
- INSTANTANTANEOUS FEEDBACK
   ABOUT PRICES
- IMMEDIATE ADJUSTMENT OF PRODUCTION
- COUNTERCYCLICAL INVENTORY POLICY
  (requiring storable goods)
- EXTRA CAPACITY
- MARKET POWER
- COMMUNICATION, PLANNING OF MEMBERS
  IN MARKET. INFORMATION ON MARKET
- MARKETS THAT ALLOW SPECULATION
  AGAINST UNSTABLE BEHAVIOR
Price             COBWEB MODEL
 80
 70
 60
                      Bo
 50                        Ao                  B1
 40                                  A1
                     A3
 30                             A2
 20
 10       B3                              B2
  0
      0          5         10             15        20
          CHEMICALS (millions of pounds/year)
      Quintiles Based on Per Capita
                 Income
Quin-   Cumu-      % of     Cumu-    Inequal-   Average Inequal-
tile    lative %   World    lative   ity        Inaequal- ity %
                   GNP      % GNP    (2)-(4)    ity/%
(1)     (2)        (3)      (4)      (5)        (6)        (7)

 0       0                           0
20      20         1.80     1.80    18.2        9.1        182
30      50         2.58     4.38    45.62       31.91      957
10      60         2.53     6.91    53.09       49.36      494
20      80         17.22    24.13   55.87       54.48      1090
20      100        75.87    100       0         27.94      559
Total              100.00   Measure of          Inequali   32.81
                                                ty
100
          WORLD INCOME DISTRIBUTION
 90
                                      Cumulative
 80
                                      % of:
 70
                                      Coun- GNP
 60

 50
                                      tries
 40
                                       0      0
                                       20    1.8
 30
                                       50    4.4
 20
                                       60    6.9
 10
                                       80    24.1
  0
                                      100   100
      0     20   40   60   80   100
          WORLD INCOME DISTRIBUTION
100

 90

 80

 70         LINE OF
 60         EQUALITY
 50

 40                   USA
 30

 20

 10                         WORLD
  0
      0     20   40    60    80   100
    MEASUREMENT OF BENEFIT
Price of Fish        Supply WITHOUT
                     CFC Regulation



                              Supply WITH
 INCREMENTAL
                              CFC Regulation
 BENEFIT OF
 CURBING POLLUTION




                               Demand



                         Fish (tons per year)
                Social Costs and Benefits
       Regulatory Total           Social       Increment- Increment- Net Social
       Policy     Benefits        Costs        al Benefits al Costs  Benefits
       (beginning  (1)            (2)            (3)        (4)      (5)=(3)-(4)
       No              0               0            0             -             -
       Controls*
       CFC          3314          7            3314          7            3307
       freeze
       (1989)
       CFC 20%      3396          12           82            5            77
       (1993)
       CFC 50%      3488          13           92            1            91
       (1998)
       CFC 80%      3553          22           65            9            56
       (2003)
       CFC 99%      3583          53           30            31            -1
       **(2005)

*Base used for comparison for computring benefits and costs of phasing out CFCs     ** Hypotehtica
          SOCIAL COSTS AND BENEFITS

100
 90                           92
                                   Incremental Social
 80                 82
                                       Benefit
 70
                                            65
 60
 50
 40
 30                                                     31
                                                        30
                                   Incremental
 20
                                   Social Cost
 10       7                                 9
                    5
  0                           1
      0        20        50            80          99
IMPACT OF THE DISCOUNT RATE
45000
            43154
40000

35000

30000

25000

20000

15000

10000                   10873

 5000
                                    3419
    0                                                      49
        0           1           2          3   4   5   6
        COSTS OF DECISIONS
$ OF COST



                     Minimum
                       Cost



  External          Total of
  Costs of          Internal
  Excluding                              Internal
                    & External
  People                                 Costs of
                    Costs
  from                                   Gaining
  Decision                               Decision
Dictatorship (0%)   Majority (50%)      Unanimity (100%)
       PERCENT OF PEOPLE REQUIRED FOR DECISION
          GOVERNMENT STUDIES
Type of              Objective of Study Definition and            Implicit             Problem
Study                                   Focus                     Constraints          ________
Cost Benefit         Net Social Benefit    Benefits & costs        None                Comprehensive
Analysis                                   included to                                 measurement of
                                           whomever                                    benefits & costs is
                                           occurring                                   hard
Regulatory Impact    Net Social Benefit    Includes cost        Environmental &        Goes beyond cost-
Analysis             & other social        benefit analysis and other constraints      benefit, but
                     objectives            other studies                               becomes very
                                                                                       subjective
Economic Impact      Describe all          Examines price,        Assumes impacts      Regulation
Analysis             regulatoryt impacts   output, financial, &   should be minimal    discouraged.
                                           employment                                  Limited weighing
                                           impacts                                     of costs/benefits
Closure Analysis     Maximize              Defines degree of      Implicitly, firms    Overregulates
                     regulatory            regulation that will   are not to be shut   profitable,
                     objective             shut firms down        down                 underregulates
                                                                                       unprofitable
Cost Effectiveness   Maximize pollution Avoids $ value on         Budget or cost       Comparisons
Analysis             abatement, etc.    benefits of               constraint limits    difficult across
                                        government                amount of            different types of
                                        intervention              intervention         intervention
Fiscal Impact        Up to decision     Focuses only on           Govt. revnue must    Ignores costws &
Analysis             makers             govt. unit                exceed cost          benefits to society
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
-PUBLIC GOODS-NATIONALIZATION
MARKET         -PRIVATIZATION
  POWER        REGULATION
INEQUITIES        - OUTPUT
DYNAMIC           - PRICE
  MKT. FAIL.     - STANDARDS
INDIVISIBILITY ANTITRUST
INFORMATION      -STRUCTURE
  ASYMMETRY -CONDUCT
                TAXES (SUBSIDIES)
                PROVISION OF
                    INFORMATION
                RATIONING (MONEY)
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE        ADMINISTRATIVE
-PUBLIC GOODS-NATIONALIZATION           COST
MARKET         -PRIVATIZATION       COMPLIANCE
  POWER        REGULATION               COST
INEQUITIES        - OUTPUT            EFFICIENCY COST
DYNAMIC           - PRICE            - NEGATIVE EXTER.
  MKT. FAIL.     - STANDARDS        -PUBLIC BADS
INDIVISIBILITY ANTITRUST            - MKT POWER
INFORMATION      -STRUCTURE         - INEQUITIES
  ASYMMETRY -CONDUCT                - DYNAMIC
                TAXES (SUBSIDIES)    - INDIVISIBILITY
                PROVISION OF         - INFORMATION
                    INFORMATION
                RATIONING (MONEY)
Types of Control      Government Failures that lead
by Governing Bodies   to Stronger Government

No Central Control    Tyranny (Dictatorship) by the Strongest

Confederation         Indecisiveness: Extortion by the Weakest

Central Control       Dictatorship by the strongest
Examples of World Governing Bodies & Treaties
    United Nations (Security Council)
    World Trade Organization (precursor: GATT)
    World Bank & IMF
    Montreal Guidelines (CFCs)
    SALT
    Regional Groups: NAFTA, EEC (& Euro),
    NATO
    Geneva Conventions & the Hague
    Land Mine Convention
    Extradition Treaties
    Law of the Sea
    Law of Antarctica
    Law of Space

				
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