Keeping the competiton out

Most competitors prefer no competition. If a firm can keep the competition out, profits are sure to rise. But the worse thing about it is some governments prefer no competition too. With reasons ranging from preventing the ravages of competition from taking their toll to preventing accidents and traffic problems, the government tries to prevent competition. This is done either through regulation or direct involvement in the market itself. Most of the time, the effects are to the society’s loss. Reducing the number of firms in an industry decreases the supply of the good, thus driving up its price. Firms that remain enjoy both higher prices for their products and larger market shares. Consumers lose, suffering not only from higher prices but also from limited array of choices. The other group of losers is the firms who are barred from entering market. They are forced to go into low-paying pursuits for which they are not as well suited. This limit on competition reduces the total extent of mutually beneficial exchange.

It is without question that government plays an important role in making sure that a market works efficiently. Governments must enforce property rights and contracts, and develop infrastructure where the positive externalities of public goods cannot be captured by the private sector. Governments must take on the responsibility of protecting the rights of consumers, who are most often than not, highly unorganized and misinformed. On the other hand, it should be obvious to governments where their limitations start. Clearly the price of the good is one of the indicators. As soon as their regulations or involvement have started to reflect adversely in the prices, it should be time to rethink their strategies.

I don’t think governments realized yet to the full extent what Adam Smith said about the benefits of the invisible hand when he said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest". At the rate at which most governments meddle and put up protectionist policies, Adam Smith may be tossing and turning in his grave by now.

The effects of minimum wage

Proponents of the minimum wage (the lowest hourly wage firms legally should pay their workers) say that minimum wage improves the welfare of individuals at the bottom of the wage distribution by raising their earnings. This can be achieved with little disruption to workers or businesses. Supported by some recent studies, however, opponents say that minimum wage’s shortrun effects may be negligible, but the long run adverse effects are quite substantial: over time, the higher costs due to a higher minimum wage force smaller firms out of business, and it is here that the drop in employment shows up clearly. After all, the number of workers demanded, like the quantity demanded for all goods, responds to price: the higher the price, the lower the quantity desired. In addition, higher minimum wage also results to more work discrimination, less job training for low-skilled workers, and fewer fringe benefits, all in an effort to hold down total labor costs. The debate is still on, between favoring more jobs, less discrimination, and more on-the-job training versus favoring better wages for workers.

Markets exist when buyers and sellers interact. This interaction determines equilibrium prices and thereby allocates scarce goods and services efficiently. By defining and enforcing property rights, the government sometimes helps in making sure that market prices can perform their role in efficiently allocating scarce resources. However, sometimes, it’s the prices themselves that the government influences, and no matter how noble the reasons are, these government actions lead to adverse effects in the market. In other words, the costs of government policies sometimes exceed benefits. This occurs because social goals other than economic efficiency are being pursued. I think there are better ways for the government to address the welfare issues of workers, policies where the market price of labor is unaffected. Any change in the price of labor would change the behavior of firms, which as shown can be detrimental to the laborers who are, in the first place, the beneficiaries of the government’s intervention. For one thing, the government could shoulder the costs of addressing the welfare issues, like in the form of tax credits. Whatever the implication of this proposal to the government fiscal position is another issue. Bottom line is, if the market price of labor is artificially changed, there will be adverse effects on the allocation of labor and of wage. Labor being an input to production, this will eventually have effects on the market of goods or services.

Is water different?

One of the most common assumptions is that water is not a normal economic good, and that it is the most necessary of all necessities that its price elasticity of demand is perfectly inelastic; both in the short-term and in the long-term, the same quantity of water will be demanded per person. The book however has proven this to be not entirely true. For a particular case in Boulder, Colorado, for example, water usage among residents was extremely lower when metering of actual usage was implemented than before the meters were installed. Furthermore, the quantity of water demanded continued to fall slightly, which means that the long-run price elasticity of demand for water was greater than the short-run price elasticity of demand. These findings are useful insight into policies that would help solve problems on water shortages and endemic wastes. Raising the price of water may help provide incentive to people to save more water, which is turning out to be scarcer every minute.

Saying that water is a scarce good is similar to saying a banana is a scarce good. Water is still subject to the same supply and demand laws as do bananas. Banana is expensive in places where they do not grow and cheap where they are abundant; water is also cheap in areas where it is abundant, but it will become expensive as it begins to become scarce. Water is still rightly called the most necessary of necessities. It just so happens that people are wasting too much of water or consuming more that they necessarily need. It will eventually come down to a situation where water is so scarce that even at the highest price, you’re will to purchase a quantity that is only sufficient to your needs. At this point, the price elasticity of water will become perfectly inelastic. We’re just fortunate enough that government is taking measures to ensure that water is not wasted through price mechanism. One can survive without bananas. One can’t survive without water.

Crime and Punishment

Crime rates that have gone up hand-in-hand with prison populations, coupled with criminals who seem impervious to law enforcement, have led many people to ask a simple if disturbing questions: Is there any effective way to fight crime? It is increasingly clear that the two central tools of traditional law enforcement- police to apprehend the criminals and prisons to punish them- may be every bit as effective as their proponents claim in discouraging criminal activity. Economists study crime and punishment in two aspects: how a criminal might be expected to look at the anticipated costs and returns of criminal activity; and how government consider the benefits and costs of an additional person to the prison, as well as the benefits and costs of an additional officer to the police force. Two areas on which economists have focused their study of crime and punishment are: (1) the impact of increasing the probability that criminals will be detected and apprehended; and (2) the role of punishment. One important study found out that the benefits and costs of punishment are marginal. The strongest deterrent of police and the effect of imprisonment are strongest on more violent crimes. Two lessons that emerge from these studies: (1) politicians are likely to continue pouring more money into law enforcement, and (2) those resources are going to have a growing impact in reducing crime.

Even the analysis of crime and punishment involves the consideration of marginal benefit and marginal cost of committing a crime, and enforcing a deterrent to crime. It’s almost always that every crime involve economic considerations, and from two point of views. From the crime offender’s point of view, he tries to maximize the benefits he will get considering the costs he will incur, which includes the punishment he gets depending on the probability of getting caught. From the government’s point of view, it tries to minimize the harm a crime can give to any group or individual considering the revenue it can get from the punishment of captured offenders (i.e. fines) and the cost of system of enforcement. Of course, the offender has influence on how he weighs the benefits of the crime. The probability of getting caught is also under his control. The kind of punishment, as well as the system of enforcement being applied is up to the government. One insight from this analysis is that punishment should fit the crime; meaning, larger levels of enforcement and larger fines should impose larger marginal costs on the criminal, and this would lead to a reduced level of criminal activity. Another insight is that although both increasing the cost of crime for a criminal and increasing the level of enforcement are effective deterrents to crime, the latter is costly to the state, while the former imposes no cost at all.