Public Policy in Private Markets

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Public Policy in Private Markets

• The Policy Process

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Last time

• Why public policies for private markets?
• The perfectly competitive market as a benchmark
• Rationales for government intervention (mkt
  power, imperfect info, mkt failures)

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Today

• Steps in the policy process
• Sources of possible government failure
• A short regulatory history
• Aims and review of antitrust laws

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Steps in the Policy Process

• Problem Recognition
• Policy Formation
• Policy Application
• Policy Enforcement

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Important tool cost-benefit analysis
Total Costs

Total Benefits
Maximum Net Benefit
Environmental quality
Q
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Important tool cost-benefit analysis

Marginal Costs
Marginal Benefit
Environmental quality
Q
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Important tool cost-benefit analysis

• Do not carry out a policy if costs gt benefits.
  Benefit/cost ratio gt 1
• Typically, a policy will not make everyone better
  off
• Some lose, some win
• Ideally compensate losers with gains
• Inevitably some will not be made better off

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Important tool cost-benefit analysis

• Dynamic analysis future benefits and costs need
  to be discounted
• Projects that have negative flows in the first
  years and positive flows in later years are
  particularly affected (positive numbers are
  discounted more heavily)
• However, future gains may also be larger as
  society may be more concerned in the future

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Cost-Benefit Analysis Important Points
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2. Policy Formation

• What type of approach yields best mix of costs
  and benefits? 2 parts
• a. Choice of Policy focus economic issues do
  we want to affect, S, C or P?
• Example High concentration in the RTE cereal
  industry that leads to high prices and profits.
  Focus
• Structure reduce CR by some means
• Conduct regulate advertising, product
  introductions
• Performance regulate prices (profits)

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2. Policy Formation

• b. Choice of Policy Instrument regulation
  mechanism
• Example Suppose a structural approach is taken.
  Two possible policy instruments
• Antitrust case against leading firms. Goal
  breakup
• Direct Regulation. By Act of Congress tell
  Kellogg to split in 3 companies.
• Precedent 1930s bills to split commercial and
  investment banking

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3. Policy Application

• Legislation is general. Federal agencies write up
  the specific regulations
• Example
• Congress tells FDA to ensure that drugs in the US
  are safe (general legislation)
• FDA has to specify scientific research protocols
  to be used in showing what is safe or not.

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Costs Benefits Alternative regulations
Desirable? Overlap?
Secret process
Public Discussion
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More of a passive role
Infrequent
Regulation can be later reviewed by courts
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4. Policy Enforcement

• Policing and enforcement structure.
• Amount of resources
• Law is normally written so that maximum level of
  voluntary compliance is achieved.

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What are government costs?

• Important points
• Cost to society of regulation approx. 9.2 of
  GDP
• 6,900 per household
• Largest costs are the Environmental Protection
  Agencys (EPA)
• Paperwork costs are 1/3 of total costs

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What are government costs?

• Important point Social regulation and homeland
  security

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What are government costs?

• Important point lt0.1 of working population

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Source of possible government failure

• 1. Problem Recognition
• Whose voice is heard
• Concerned parties may lack information and/or
  incentive
• Special interest groups may be effective in
  having their voice be heard, even if that problem
  may not be too important
• Focus particular problems are solved (more
  rapidly) whereas others may not fit the
  bureaucracy structure

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Source of possible government failure

• 2. In Policy Formation
• Policy may not be timely. Crisis atmosphere
• Policy may not be precise it may miscalculate
• May not be sufficient. Hard to anticipate all
  ramifications

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Source of possible government failure

• 3. In Policy Application
• With general legislation, policies are formulated
  at agencies.
• Process may be skewed by special interest
  lobbying
• Red tape. Examples
• Red dye 3 (used in cherries) has been under
  consideration since 1960
• Organic rules took 10 years.

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Source of possible government failure

• 4. In Policy Enforcement
• Inadequate resources inefficient enforcement
  (possible inequitable)
• Delay
• Examples ATT case was in courts for 8 years. RTE
  case in courts for 10 years

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Source of possible government failure

• To summarize
• Government is not perfect
• Markets are not perfect
• Both are part of our daily lives
• Our goal understand them both

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A Brief Regulatory History

• Pre-1880s
• Economy made up of local markets
• Transportation system was not developed
• Few corporations were allowed for specific
  purposes e.g. railroads

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A Brief Regulatory History

• 1880s-1905
• States began letting companies incorporate freely
• Large industrial and transportation companies
  start to control national markets
• Abuses of market power became visible

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A Brief Regulatory History

• 1880s-1905
• Reform movement especially aimed at abuses by
  railroads
• Interstate Commerce Commission Act (1887)
  Railroad regulation
• Sherman Act (1890) Monopoly, price fixing

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A Brief Regulatory History

• The Joint Executive Committee (1880-1886)
• Cartel that controlled Eastbound freight
  shipments from Chicago
• Publicly acknowledged agreement
• 73 of shipments were grain

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A Brief Regulatory History

• 1880s-1905
• Acts not fully enforced for 15-20 years
  (conservative Supreme Court)
• Period ends with massive mergers (1897-1903)
• US Steel, Du Pont, American Tobacco, National
  Biscuit (Nabisco)

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A Brief Regulatory History

• 1905-1915
• Progressive era
• 1906 Federal Food and Drug Act
• Under Sherman Act Roosevelt sues 45 companies
  and Taft 75
• 1911
• Standard Oil (Rockefeller) is obligated to break
  up the company in more than 36 units (Mobil,
  Amoco, Exxon, etc.)
• American Tobacco

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A Brief Regulatory History

• 1905-1915
• Progressive era
• Sherman Act was not clear as to what was illegal,
  so in 1914
• FTC Act, outlawed unfair business practices
• Clayton Act, regulates mergers, price
  discrimination, exclusive dealing agreements

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A Brief Regulatory History

• 1915-1925
• Quiet period
• 1925-1938
• Active regulatory period due to stock market
  crash in 1929 and the Great Depression
• Firms allowed to cooperate (cartelization) under
  National Recovery Act (later deemed
  unconstitutional) e.g. strengthening of trade
  associations

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A Brief Regulatory History

• 1938-1945
• Return to strong enforcement
• 1938 Robinson-Patman Act, deals further with
  price discrimination
• Many antitrust cases are brought forward
• 1950s
• Cellar-Kefauver Act, strengthens merger
  regulation of Clayton Act (asset purchases)

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A Brief Regulatory History

• 1960-1980
• Era of SOCIAL regulation
• Environment, health, safety, equal opportunity,
  etc
• Based on intra-firm decisions (how and what firms
  produce) rather than on market performance

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A Brief Regulatory History

• 1980-today
• Era of deregulation
• Airlines (Airline Deregulation Act, 1978),
  telecommunications (1996), railroads (Staggers
  Rail Act of 1980), trucking, banking (Garn-St
  Germain Depository Institutions Act,1982 )
• Also, an era of product regulations
• Not much increase in antitrust regulation

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Aims of antitrust laws

• 1. Maintenance of Workable Competition
• (STRUCTURE)
• Not perfect competition (unrealistic)
• Rather as competitive a structure as possible
  (given basic conditions)
• What is workable?
• Difficult to define (but you get the idea)

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Aims of antitrust laws

• 2. Ensure Fair Business Practices
• (CONDUCT)
• Again, What is fair?
• Equal opportunity, ethically acceptable
• What conduct yields the best performance?

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Aims of antitrust laws

• 3. Promote desirable performance
• (PERFORMANCE)
• Right mix of products (e.g. not too unhealthy)
• Lowest possible price