- When efficiently functioning markets exist for a program’s inputs and
outputs, we can value the associated benefits and costs at market prices.
The valuation of nonmarketed impacts and “intangibles” follows one of
three approaches: (a) direct elicitation of values, (b) values based on
indirect market values, and (c) values based on public policy.
Questions and Problems
- Suppose Coca-Cola and Pepsi announced plans to merge into a single
global soft-drink company. What would be the possible effects on soft-
drink consumers? What kind of regulatory scrutiny should the U.S.
government cast on the proposed merger? - Two firms in a city compete as duopolists and face the industry demand
curve: P 120 .2Q, where Q denotes total output (in thousands of
units). For each firm, LAC LMC $60 per unit. In equilibrium, each
firm produces: Q 1 Q 2 100 thousand units.
a. Compute total industry profit and consumer surplus.
b. Now suppose that the two firms have decided to merge to take
advantage of economies of scale that will drive long-run average cost
down to LAC $50 per unit for the merged firm. With no other
rivals, the merged firm will act as a monopolist. Determine the
monopoly price and quantity.
c. Antitrust authorities are considering blocking the merger on the
grounds that it is anticompetitive. The firms argue that the merger is
pro-competitive because of the significant cost reductions. Is total
welfare(accounting for both the effect on consumers and the effect on
industry profit) higher or lower after the merger than before? - A state in the northwestern United States faces a number of problems
concerning the production of its paper products. The wood pulp
industry (from which paper is made) is a monopoly that generates a
significant amount of pollution. As the state’s secretary of commerce,
you have hired three analysts to help you think through several
government policy alternatives. The demand for wood pulp is given by:
P 500 10Q, where Q is measured in thousands of units. The long-
run cost of production exhibits constant returns to scale: LAC LMC
150. Producing a unit of wood pulp generates one unit of pollution. The
marginal external cost is estimated to be 100 per extra unit of pollution.
a. Analyst A advises no government intervention at all. In this case, what
quantity and price will prevail in the (monopolized) industry?
b. Analyst B is mainly worried about the monopolization of the industry,
and, therefore, recommends that you promote competition through
regulation and antitrust policy. What quantity of pulp would a
perfectly competitive industry produce?
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