Contemporary Economics: An Applications Approach By Robert J. Carbaugh 3rd Edition

1. Contemporary Economics:An Applications ApproachBy Robert J. Carbaugh3rd Edition Chapter 7: Government and Markets

2. 14 11 13 12 10 11 10 9 9 8 7 8 6 5 7 4 3 6 2 1 0 5 0 6 12 18 0 12 Kilowatt hours (mill.) Kilowatt hours (mill.) Economic Regulation & Deregulation Public utility regulation of natural monopoly Fair-return pricingresults in normal profits Excessive costs may occurunder fair-return pricing cents cents Monopoly price C Fair-return price ATCII A B ATC ATCI A MC ATC Demand = Price MR Carbaugh, Chap. 7

3. 50 45 40 35 30 25 20 15 10 5 0 0 50 100 150 200 Kilowatt Hours Deregulation California's electricity woes Cents per Kilowatt hour S1 Wholesale price of electricity bought by California utilities S0 Price Ceiling D1 Retail price of electricity sold by California utilities D0 Carbaugh, Chap. 7

4. 180 160 140 120 100 80 60 40 20 0 0 Quantity of chemicals (lbs.) Externalities Correcting for market failure: spillover costs Costs of pollution $ With spillover costs of pollution S1 Without spillover costs of pollution S0 B A Overproduction D0 900 700 Carbaugh, Chap. 7

5. 14 12 10 8 6 4 2 0 10 30 50 70 90 110 130 Packages of medicine Externalities Correcting for market failure: spillover benefits Market failure $ S0 B A With spillover benefits D1 Underproduction Without spillover benefits D0 Carbaugh, Chap. 7

6. 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 10 30 50 70 90 110 130 10 30 50 70 90 110 130 Packages of medicine Packages of medicine Externalities Correcting for market failure: spillover benefits (cont'd) Government law orconsumer subsidy Producer subsidy $ $ S0 S0 S1 B A A D1 C D0 D0 Carbaugh, Chap. 7

7. 900 900 800 800 700 700 600 600 500 500 400 400 300 300 200 200 0 1 2 3 4 5 6 7 8 9 10 11 0 2 4 6 8 10 12 14 Steel (tons) Steel (tons) Regulation and Competitiveness Trade effects of pollution-control regulations Mexico United States $ $ SUS1 SUS0 SMexico A' D' E D B B' C C' DUS0 A DMexico Carbaugh, Chap. 7