Pertemuan Government Regulation Chapter 17 Matakuliah: J0434 / Ekonomi Managerial Tahun: 01 September 2005 Versi: revisi

Learning Outcomes Pada akhir pertemuan ini, diharapkan mahasiswa akan mampu : menganalisis mengenai regulasi pemerintah, bentuk organisasi dan rancangan mekanisme (C4)

Outline Materi Antitrust Regulatory Constraints An Economic Analysis The Deregulation Movement Government Support to Business Solutions to Externalities

Antitrust : Government Regulation of Market Conduct and Structure In trusts, the voting rights to the several firms are conveyed to a legal trust to manage the group of firms as if it were one firm. This tends to create monopolization of an industry. The Sherman Antitrust Act (1890) outlawed monopolies per se and attempted monopolization.

The Clayton Act The Clayton Act (1914) extended the list of conduct that was anti-competitive: a.price discrimination. b.tying contracts force customers to buy added products with one product. c.purchasing shares of competing firms as an anti-merger section. d.corporate directorship interlocks occur when the same people are in directorships of competing firms.

The Federal Trade Commission was established in 1914 to prohibit unfair methods of competition. The Celler-Kefauver Antimerger Act (1950) restricted mergers through asset acquisition when the acquisition "may be substantially to lessen competition." The Hart-Scott-Rodino Antitrust Improvement Act (1976) requires notification by large firms to the Justice Department of impending mergers. The Robinson-Patman Act of 1936 amended section 2 of the Clayton Act on price discrimination when it injures competition.

Robinson-Patman Act of 1936 Section 2(a) prohibits price discrimination which "substantially lessen competition". Section (2b) provides a cost justification for price discrimination. Section (2c) prohibits some kinds of brokerage commissions. Sections (2d-2e) prohibits discounts to buyers not afforded to other customers. These sections are the basic laws against price discrimination.

Regulatory Constraints An Economic Analysis Operating controls appear in environmental pollution and product quality and safety issues. The government, mandates that automobile manufacturers must sell cars with seat-belts and must attain certain emissions standards for their fleet. EXAMPLES: DuPont forced to reduce emissions of chlorofluorocarbons (CFCs), or Palladium Metal-Casting – Adding an additional fixed cost (to reduce smoke) lowers profit without changing the price. –If the operating controls raise variable costs, the output and price changes in the directions you would expect: higher prices and lower output.

The Deregulation Movement Airline and trucking have been deregulated. They are no longer "infant industries." Deregulation of long-distance occurred due in large part to technological changes in transmitting phone messages by microwave.

Government Support to Business Governments historically have helped some companies by restricting or eliminating competition. Examples –Licensing of professions (or businesses) –Patents of ideas or processes restricts use of the idea –Restrictions on price competition

Other Governmental Regulations Import Quotas and Import Tariffs Government Subsidies Government Promotion occurs when the government spends money on research & development or on the benefits of particular life styles or practices. Tax as a Regulatory Tool.

Economic Externalities and Market Failure Types of Externalities Production Externalities: –External Production Economies  expansion generates benefits to other firms. –External Production Diseconomies  expansion generates uncompensated costs on other firms. Consumption Externalities: –External Consumption Economies  an increase in use of this product increases the utility of others. –External Consumption Diseconomies  an increase in use results in uncompensated costs on others.

The Coase Theorem The Coase Theorem: if the transaction costs for private contracting between parties are very low, the problems of externalities will be resolved without governmental intervention. Even if governments and the courts can assign property rights or duties however they wish, the solution is unaffected when transaction costs are low.

More on the Coase Theorem Cattle Ranchers –Suppose a fence costs $500,000 –Suppose damage to corn is $100,000 by cattle –What should happen? Corn Farmers –Suppose a fence costs only $100,000 –Suppose damage to corn is $500,000 by the cattle –What should happen?

But Property Rights Matter in a world with transaction costs It is often costly to arrange contracts between ranchers and farmers Suppose the fence costs more than the damage –If the property right to safe crops is established, the farmer will want a fence regardless of cost. An uneconomic fence is constructed. –If the property right is to open range grazing, the rancher will not want a fence. No fence is built. –Therefore, who gets the property right matters!

Solutions to Externalities Solution by: Prohibition Directive Voluntary Payment Merger Taxes and Subsidies Sale of Pollution Rights Regulation

Summary Governments historically have helped some companies by restricting or eliminating competition. Examples –Licensing of professions (or businesses) –Patents of ideas or processes restricts use of the idea –Restrictions on price competition Import Quotas and Import Tariffs Government Subsidies Government Promotion Tax as a Regulatory Tool.