Question

ECO 202 Microeconomics

Question 1. Provide solutions for the following:

a) Discuss the differences between a policy protecting competition and policy protecting competitors.

b) Explain the concept of optimal pollution. Why might an ardent environmentalist and an economist have different views as to where "optimal" was?

c) Wind power is subsidized by the government with tax subsidies and purchase mandates. Explain how externalities theory might justify such subsidies. Is the wind subsidy an example of crony capitalism? Why or why not?

d) In what ways are unions similar and/or different from monopolists?

Answer 1

a) As far as policy formulations are concerned, it is always expected to protect the competition and not the competitors. Protecting a competition means to protect the market and prevent the growth of an oligopoly or monopoly market system in an economy which may prove harmful in attaining an economic growth. But protecting a competitor refers to any policy making process that protects any actions done by a competitor, which may be dreadful for an economy. The antitrust case filed against Google reiterates the fact that no government policy will intend to protect any competitor when the competition is unfair and hence protection of competition alone can form the part of a policy making process

b) Optimal pollution refers to the level of pollution that maximises the social welfare by equating the marginal cost of additional pollution with the marginal benefit. It recognizes that there may be benefits to allowing a pollution which may be lost when it is not allowed. For example. Industrial processes are always pollution making, but scrapping all the industrial processes is not the solution for it, which may lead to disruption of an economy and a society as a whole. It should be done in a fair manner so that the pollution levels are not alarmed and hence the nature remains protected for the future generation. But in this case of a sustainable development, an ardent environmentalist always tries to oppose anything that creates an amount of pollution which may not be the case of an economist who considers the development of an economy which in turn leads to the development of the society in itself. Thus as far as optimal pollution is concerned, the society and its economy can never be curtailed unless it is a threat to itself.

c) An externality is an economic term that refers to a cost or a benefit incurred or received by a third party. However, the third party has no control over the creation of that cost or benefit. A crony capitalism refers to an economic system characterized by close, mutually advantageous relationships between business leaders and government officials. Here, subsidising the wind energy can be justified by the fact that the production of a renewable source of energy which is no polluting may not lead to any externalities to other factors of production or any other business. It can contribute to the energy framework of a nation and hence can be considered as advantageous to the society and the economy as a whole. With may cases reported against illegal sanctioning of orders for the establishment of such projects, it cannot be ruled out that the subsidization process is a part of crony capitalism. But the element of it is seemingly lesser and thus never forms a threat to an economy as such as defined by the concept of crony capitalism.

d) Unions, especially dominated by the labour unions can be treated in an economy as an inefficient or less efficient monopoly. They can be called as monopolies due to the fact that they always fight for their rights which in most of the cases seems to spring out of individual tenets. Compared to a monopoly market, there is no competition available. Here, there is an existence of a competition wherein many of a union’s proposals or needs are strongly defended by other unions. But unlike a business or a market, the unions don’t have a direct say in an economy as most of its actions and results depends on the decisions taken by the competing authority. Hence although the unions may be considered as monopolies, they can never be fit into the same shoe as a monopoly in an economic system goes.