Role of Government in free markets

JWI 515 Managerial Economics, Week7 Summary, 11/25/12

This week we learned principles of social welfare economics, perfect competition, the role of government and pros and cons of deregulation in an industry.

Social welfare = Consumer and producer surpluses
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Consumer surplus is the difference between the maximum amount consumers are willing to pay for a product and what they actually pay. Producer surplus is the difference between the minimum amount producers are willing to receive for a product and what they actually receive.

Role of Government in markets
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- Balance consumer sovereignty and social fairness by stepping in to mitigate externalities, the unforeseen consequences in a free market.
- set price floors and price ceilings as part of public policy

Perfect Competition
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Markets are said to be perfectly competitive when they
- feature a large number of buyers or sellers that each have a non-controlling market share and
- when they are filled with homogeneous products that can easily be substituted for one another.
- Free entry and exit also exist, meaning no legal barriers of regulation exist that potential firms must satisfy to be members of an industry. 
- Meanwhile, everyone in the industry has wide access to cost information, so companies are price takers.
- Finally, companies have the ability to earn a normal profit over the long run.

NYSE has several deviations from perfect competition as we discussed in DQ1.

Deregulation
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The process of simplifying or eliminating government rules that hinder businesses and thereby spur competition, attract investment.
The pros and cons of deregulation in several industries such as telecom, airlines and trucking were examined.

Dr DP