0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

Ao

CHEMICALS (millions of pounds/year)

Price

SUPPOSE PRICE IS ABOVE EQUILIBRIUMPRICE. QUANTITY SUPPLIED IS GREATERTHAN QUANTITY DEMANDED.

x

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

CHEMICALS (millions of pounds/year)

Price

A price above equilibrium causes the producersto provide a higher quantity supplied than whatis demanded.

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

A2

CHEMICALS (millions of pounds/year)

Price

Such a high quantitysupplied means that prices fall, as indicatedby the demand curve

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

A2

A3

CHEMICALS (millions of pounds/year)

Price

Such a low price means that Chemicalfirms cut back production.

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

A2

A3

Bo

CHEMICALS (millions of pounds/year)

Price

Such little supply means thatthe price rises to the amount indicated on the demand curve

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

A2

A3

Bo

CHEMICALS (millions of pounds/year)

Price

With such a high price, the quantity suppliedrises.

B1

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

A2

A3

Bo

B1

B2

CHEMICALS (millions of pounds/year)

Price

With so much supply, price falls

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

A2

A3

Bo

B1

B2B3

CHEMICALS (millions of pounds/year)

Price

Such a low price provides no incentiveto produce any product at all.

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

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

0 5 1 0 1 5 2 0

COBWEB MODEL

AoA1

A2

A3

Bo

B1

B2B3

CHEMICALS (millions of pounds/year)

Price

Quintiles Based on Per Capita Income

Quin-tile

Cumu-lative %

% ofWorldGNP

Cumu-lative% GNP

Inequal-ity(2)-(4)

AverageInaequal-ity/%

Inequal-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 Inequality

32.81

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

0 2 0 4 0 6 0 8 0 1 0 0

Cumulative % of:Coun- GNPtries

0 0 20 1.8 50 4.4 60 6.9 80 24.1100 100

WORLD INCOME DISTRIBUTION

0

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100

WORLD INCOME DISTRIBUTION

LINE OFEQUALITY

USA

WORLD

MEASUREMENT OF BENEFITSupply WITHOUTCFC Regulation

Supply WITHCFC Regulation

Demand

Price of Fish

Fish (tons per year)

INCREMENTALBENEFIT OFCURBING POLLUTION

Social Costs and BenefitsRegulatoryPolicy

TotalBenefits

SocialCosts

Increment-al Benefits

Increment-al Costs

Net SocialBenefits

(beginning (1) (2) (3) (4) (5)=(3)-(4)

NoControls*

0 0 0 - -

CFCfreeze(1989)

3314 7 3314 7 3307

CFC 20%(1993)

3396 12 82 5 77

CFC 50%(1998)

3488 13 92 1 91

CFC 80%(2003)

3553 22 65 9 56

CFC 99%**(2005)

3583 53 30 31 -1

*Base used for comparison for computring benefits and costs of phasing out CFCs ** Hypotehtical

SOCIAL COSTS AND BENEFITS

7 5 19

31

8292

65

30

0102030405060708090100

0 20 50 80 99

Incremental Social Benefit

IncrementalSocial Cost

43154

10873

3419490

5000

10000

15000

20000

25000

30000

35000

40000

45000

0 1 2 3 4 5 6

IMPACT OF THE DISCOUNT RATE

COSTS OF DECISIONS

ExternalCosts ofExcludingPeople fromDecision

Minimum Cost

InternalCosts ofGainingDecision

Total of Internal& ExternalCosts

Dictatorship (0%) Majority (50%) Unanimity (100%) PERCENT OF PEOPLE REQUIRED FOR DECISION

$ OF COST

GOVERNMENT STUDIESType ofStudy

Objective of Study Definition andFocus

ImplicitConstraints

Problem________

Cost BenefitAnalysis

Net Social Benefit Benefits & costsincluded towhomeveroccurring

None Comprehensivemeasurement ofbenefits & costs ishard

Regulatory ImpactAnalysis

Net Social Benefit& other socialobjectives

Includes costbenefit analysis andother studies

Environmental &other constraints

Goes beyond cost-benefit, butbecomes verysubjective

Economic ImpactAnalysis

Describe allregulatoryt impacts

Examines price,output, financial, &employmentimpacts

Assumes impactsshould be minimal

Regulationdiscouraged.Limited weighingof costs/benefits

Closure Analysis Maximizeregulatoryobjective

Defines degree ofregulation that willshut firms down

Implicitly, firmsare not to be shutdown

Overregulatesprofitable,underregulatesunprofitable

Cost EffectivenessAnalysis

Maximize pollutionabatement, etc.

Avoids $ value onbenefits ofgovernmentintervention

Budget or costconstraint limitsamount ofintervention

Comparisonsdifficult acrossdifferent types ofintervention

Fiscal ImpactAnalysis

Up to decisionmakers

Focuses only ongovt. unit

Govt. revnue mustexceed cost

Ignores costws &benefits to society

MARKET GOVERNMENT GOVERNMENTFAILURE 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 GOVERNMENTFAILURE INTERVENTION FAILURE EXTERNALITY PUBLIC ENTERPRISE ADMINISTRATIVE-PUBLIC GOODS-NATIONALIZATION COSTMARKET -PRIVATIZATION COMPLIANCE POWER REGULATION COSTINEQUITIES - OUTPUT EFFICIENCY COSTDYNAMIC - PRICE - NEGATIVE EXTER. MKT. FAIL. - STANDARDS -PUBLIC BADSINDIVISIBILITY ANTITRUST - MKT POWERINFORMATION -STRUCTURE - INEQUITIES ASYMMETRY -CONDUCT - DYNAMIC TAXES (SUBSIDIES) - INDIVISIBILITY PROVISION OF - INFORMATION INFORMATION RATIONING (MONEY)

Types of Control Government Failures that leadby 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 & IMFMontreal Guidelines (CFCs)SALTRegional Groups: NAFTA, EEC (& Euro),NATOGeneva Conventions & the HagueLand Mine Convention Extradition TreatiesLaw of the SeaLaw of AntarcticaLaw of Space