Knowledge that Transforms

If economists are united on anything, it is the proposition that monopoly prices reduce economic welfare by preventing the realization of the maximum gains from trade in any market. The extent of such distortions to efficiency are often called Harberger costs after Arnold Harberger's 1954 provocative attempt to measure the extent of these losses in the U.S. economy. More recent analysis has revealed that when monopoly power is achieved via regulation, at least part of the monopoly rents so gained will not be simple transfers from consumers to producers, but will be dissipated by producers' rent-seeking activity. Since such activity employs real resources, there are additional costs to monopolization beyond the Harberger costs as emphasized by Gordon Tullock (1967) and Richard Posner (1975). Indeed, Posner and others have argued that if competition for the monopoly rents is perfect, all of the expected rents from regulation will be converted to welfare losses. While Franklin Fisher's 1985 comment has qualified this conclusion somewhat, the upshot of the debate is that the rent-seeking, or Tullock, costs, may greatly exceed the Harberger costs.1 Another recent strand of the analysis concerns the time pattern over which monopoly returns are dissipated by competition to gain and hold the monopoly right. Robert McCormick et al. (1984) emphasize that to the extent such expenditures are sunk, they are forever lost and not recoverable by deregulation. While conceding the point, Martin Cherkes et al. (1986) argue that most rentseeking expenditures are recurring, not sunk, and therefore large gains from deregulation remain. The purpose of this essay is to point out that, recurring or sunk, even the largest specification of the Harberger and Tullock costs of regulatory monopolization may fall far short of the actual welfare costs. This is because the analysis concentrates on the rent-seeking Tullock costs and largely ignores the parallel rent-defending2 Tullock costs. A proper assessment of such rent-defending Tullock costs might more than double the maximum welfare costs of regulation suggested by Posner.

This paper compiles comparative measures of output per worker in 1975 in four socialist and seven Western market economy (WME) countries, and explores sources of observed differences between the two groups of countries in that regard. Such differences seem explicable only partially by reference to differences in per worker capital stock and farm land. A residual disparity of 25 to 34 percent in favor of WME countries appears to testify to superior efficiency in the latter.

This paper presents a new solution to the time-consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work. The solution involves formulating a social contract, institution, or agreement that specifies the optimal ex ante policy. The social contract is effectively sold by succesive old generations to successive young generations, who pay for the social contract through the payment of taxes. Both old and young generations have an economic incentive to fulfill the social contract. For the old generation, breaking the social contract makes the social contract valueless, and the generation suffers a capital loss by not being able to sell it. For the young generation the economic advantage of purchasing the existing social contract exceeds its price as well as the economic gain from setting up the a new social contract.

Recent debate has focused on the desirability of imposing an oil import fee or some broader tax on oil consumption in order to finance tax reform or for some other purposes. Optimal taxation requires that the government raise revenue using the tax instrument with the lowest efficiency cost per dollar of additional revenue. A highly stylized but conventional general-equilibrium model is used to evaluate the magnitude of this marginal efficiency cost for taxes on oil imports, oil consumption, and, as a reference for comparison, labor income.

One of the leading hypotheses concerning the dynamics of production over time is the production smoothing hypothesis. Given a planning horizon which spans a number of production periods, the firm need not produce in each period an amount equal to expected sales. Rather, resorting to inventory accumulation and liquidation, the firm may follow a production plan temporally smoother than the path of demand. If firms faced with convex cost functions chose to smooth the rate of output in order to minimize costs, one would expect to observe that the rate of output would vary less than the rate of sales, with variations in inventory stocks absorbing some of the fluctuations in sales. Recently, work on the testing of the production smoothing hypothesis has cast doubt on its empirical validity. The evidence presented by Alan Blinder seems to indicate that the variance of production exceeds that of sales in seven out of eight two-digit retail industries (1981) and in eighteen out of twenty two-digit manufacturing industries (1983 and 1986). The purpose of this paper, then, is to examine the validity of such tests when seasonally adjusted aggregated data are used. The evidence presented show that the relative size of the variances of the seasonally adjusted production and sales does not provide valid tests of the production smoothing hypothesis. In addition, aggregating over firms where the seasonal patterns differ may also distort tests of production smoothing. Blinder realized that the use of seasonally adjusted data may not provide an adequate test of the hypothesis, stating Had they been available, I would have preferred to use data that were not seasonally adjusted since the production smoothing model presumably applies to seasonal fluctuations in sales. However, such data are not (1983, fn. 19). In this paper I focus on the cement industry because the unadjusted disaggregated data are available for the direct testing of the conjecture that aggregate seasonally adjusted data mask production smoothing phenomenon. Aggregate monthly data on five other industries will also be examined.

This paper presents a general-equilibrium model in which all prices and quantities transacted are the direct choices of econom ic agents: there is no Walrasian auctioneer. Multiple subgame perfect equilibria exist with prices and wages at their Walrasian levels. Among the equilibrium allocations are the Walrasian ones, but there a re also outcomes in which price- and wage-taking workers are rationed in the labor market and are unable to sell all the labor they want a t the prevailing wage. This involuntary unemployment results from sel f-fulfilling expectations of inadequate excess demand as in some inte rpretations of Keynes's ideas.