Managerial Economics in a Global Economy

Ninth Edition
By Dominick Salvatore

@Penerbit Salemba Empat

 Chapter 13
Regulation, Risk Analysis, and Capital Budgeting
• Government Regulation to Support Business and to
Protect Consumers, Workers, and the Environment.
• Externalities and Regulation
• Public Utility Regulation
• Antitrust: Government Regulation of the Market
Structure and Conduct
• Enforcement of Antitrust Laws and the Deregulation
Movement
• Regulation of International Competition
• The Effect of Taxation on Business Decisions

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2 © 2018
 Chapter 13
Learning Objectives
• 13.1 Understand the concept of market failure and the
government responses to market failure in the case of
externalities and natural monopoly
• 13.2 Be able to list the major pieces of antitrust
legislation, identify their major provisions
• 13.3 Be able to explain how they have been enforced,
and contrast the arguments in favor of regulation of
industries with those of the deregulation movement.
• 13.4 Be able to identify the mechanisms used to
regulate international trade and the effects of such
regulations

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3 © 2018
 Government Regulations that Restrict
Competition
• Licensing
– Ensure a minimum degree of competence
– Restriction on entry
• Patent
– Exclusive use of an invention for 17 years
– Limited monopoly
• Robinson-Patman Act (1936)
– Restrictions on price competition

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 Consumer Protection

• Food and Drug Act of 1906

• Federal Trade Commission Act of 1914
• 1990 Nutrition Labeling Act
• Consumer Credit Protection Act of 1968
• Consumer Product Safety Commission
• Fair Credit Reporting Act of 1971
• Warranty Act of 1975
• National Highway Traffic Safety Administration
(NHTSA)

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 Food and Drug, and Federal Trade Commission Acts

• Food and Drug Act of 1906

– Forbids adulteration and mislabeling of foods and drugs sold in
interstate commerce
– Recently expanded to include cosmetics
• Federal Trade Commission Act of 1914
– Protects firms against unfair methods of competition based on
misrepresentation
– Price of products
– Country of origin
– Usefulness of product
– Quality of product
– Wheeler-Lea Act of 1938 prohibits false or deceptive advertising

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 Consumer Nutrition, Credit, and Product Protection

• 1990 Nutrition Labeling Act

– Food and Drug Administration (FDA)
– Labeling requirements on all foods sold in the United
States
• Consumer Credit Protection Act of 1968
– Requires lenders to disclose credit terms to borrowers
• Consumer Product Safety Commission
– Protect consumers from dangerous products
– Provide product information to consumers
– Set safety standards

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 Further Consumer Protection

• Fair Credit Reporting Act of 1971

– Right to examine credit file
– Bans credit discrimination
• Warranty Act of 1975
– Requires clear explanations of warranties
• National Highway Traffic Safety Administration
– Imposes safety standards on traffic

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 Regulations Protecting Workers

• Occupational Safety and Health

Administration (OSHA)
– Safety standards in the workplace
• Equal Employment Opportunity Commission
(EEOC)
– Hiring and firing standards
• Minimum Wage Laws

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 Protection of the Environment

• Environmental Protection Agency (EPA)

– Regulates environmental usage
– Enforces environmental legislation
• Clean Air Act of 1990
– Requires reduction in overall pollution
– Established a market for pollution permits

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 Externalities

• Externalities
Harmful or beneficial side effects of the production
or consumption of some products
• Public Interest Theory of Regulation
– Regulation is justified when it is undertaken to
overcome market failures
– Externalities can cause market failures

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 Externalities of Production and Consumption

• External Diseconomies of Production or

Consumption
– Uncompensated costs

• External Economies of Production or

Consumption
– Uncompensated benefits

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Private and Social Costs of Production and
Consumption

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 Overcoming Externalities

• Prohibition
– Forbidding and activity that give rise to a negative
externality
• Tax
– Taxing of the activities that create negative externalities.
• Subsidies
– Encouraging activities that create positive externalities.
• Voluntary Payments
• Mergers

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Tax and Subsidies Graphically

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 Public Utility Regulation

• Natural Monopolies
– The firm’s long-run average cost curve is still
declining when the firm supplies the entire
market.
– Long-Run Average Cost (LAC) has a negative slope
– Long-Run Marginal Cost (LMC) is below LAC
– Regulators Set Price = LAC
– Examples:
• Electric, gas, water and local transportation companies

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Natural Monopoly Regulation

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 Public Utility Regulation

• Rate regulation is difficult in practice

• Guaranteed return gives little incentive to
control costs
• Averch-Johnson Effect (A-J Effect)
– Rates that are set too high or too low can lead to
over- or under-investment by in plant and
equipment by utility
• Regulatory Lag or 9-12 Months

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 ANTITRUST: GOVERNMENT REGULATION OF
MARKET STRUCTURE AND CONDUCT
• Sherman Act (1890)
• Clayton Act (1914)
• Federal Trade Commission Act (1914)
• Robinson–Patman Act (1936)
• Wheeler–Lea Act (1938)
• Celler–Kefauver Antimerger Act (1950)

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 Sherman Act (1890)

• Made any contract, combination in the form

of a trust or otherwise, or conspiracy, in
restraint of trade illegal
• Made monopolization or conspiracies to
monopolize markets illegal

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 Clayton Act (1914)

• Made it illegal to engage in any of the

following if the effect was to lessen
competition or create a monopoly:
– Price discrimination
– Exclusive or tying contracts
– Acquisition of competitors stocks
– Interlocking directorates among competitors

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 Federal Trade Commission Act (1914)

• Supplemented Clayton Act

• Stated that:
“Unfair methods of competition were unlawful”
• Established Federal Trade Commission
– It is intended to prosecute violators of the
antitrust laws and to protect the public against
false and misleading advertisements.

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 Robinson–Patman Act (1936)

• Passed to Amend the Clayton Act

• Sought to protect small retailers
• Made it illegal to sell more cheaply in one
market than in others at “unreasonably low
prices” with the intent of destroying
competition or eliminating a competitor.

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 Wheeler–Lea Act (1938)

• Amended the Federal Trade Commission Act

• Main Purpose
– Protect consumers against false or deceptive
advertisement.
• Forbade false or deceptive advertisement of
– Foods, drugs, corrective devices, and cosmetics
entering interstate commerce

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 Celler–Kefauver Antimerger Act (1950)

• Closed a loophole in Clayton Act

– Made it illegal to purchase not only the stock but
also the assets of a competing corporation if such
a purchase substantially lessens competition or
tends to create a monopoly.
• The act forbids all types of mergers if it lessens
competition.

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 Antitrust Enforcement

• Remedies
– Dissolution and divestiture
– Injunction
– Consent decree
– Fines and jail sentences
• Anticompetitive Conduct
– Conscious parallelism
– Predatory pricing

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 Regulation of International Competition

• Tariff
– Tax on imports
• Import Quota
– Restricts quantity of imports
• Voluntary Export Restraint (VER)
– Exporter restricts quantity of exports
• Antidumping Complaints

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Effect of an Import Tariff

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 The Effect of Taxation on Business Decisions

• Taxes and Subsidies Affect Decisions

– Taxes discourage activities
– Subsidies encourage activities
• International Differences
– The U.S. taxes labor and capital income,
discouraging work and investment
– Europe taxes consumption, which encourages
saving and investment

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Table 13-1

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 Review of Learning Objectives
• 13.1 Understand the concept of market failure and the
government responses to market failure in the case of
externalities and natural monopoly
• 13.2 Be able to list the major pieces of antitrust
legislation, identify their major provisions
• 13.3 Be able to explain how they have been enforced,
and contrast the arguments in favor of regulation of
industries with those of the deregulation movement.
• 13.4 Be able to identify the mechanisms used to
regulate international trade and the effects of such
regulations

@Penerbit Salemba Empat

31 © 2018