Regulation is typically used where there is market failure, such as the natural monopolies in energy distribution, or asymmetric market power such as between banks and individual account holders. In these instances, governments try to restore the market by restricting prices or actions. For example, in order to overcome monopolies in the postal sector, the regulator may set the price at a level that would be expected to be seen in perfect competition – price set according to a marginal cost (often calculated using a Long-Run Incremental Cost, or LRIC, model). Continue reading “Pushing regulatory boundaries”
Distinguishing demand effects and supply effects
Greg Mankiw has today highlighted how Bryan Caplan discusses fundamental inconsistencies in arguments over the minimum wage.
In some of his research, joint with Alan Krueger, Card finds that increases in the minimum wage have negligible effects on employment. In other research, on the Mariel boatlift, Card finds that increases in the supply of unskilled workers have negligible effects on wages and employment of existing workers.
Caplan notes that these results are hard to reconcile: The former suggests that labor demand is highly inelastic, whereas the latter suggests it is highly elastic. Continue reading “Distinguishing demand effects and supply effects”