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Microeconomics Question from Walter E. Williams:Edit

Give brief answers to the following:

  • (a) "Fishing in the ocean leads to too many resources being devoted to fishing." Evaluate, but first explain what is meant by "too many."
  • (b) The tendency for married couples with small children (who require baby-sitting) to spend more on entertainment when they do go out than married couples without children. Why?
  • (c) Laissez-faire capitalism encourages deceitful advertising, dishonesty and faithlessness. Comment.
  • (d) The function of assigned property rights is that of internalizing externalities. Comment.

AnswersEdit

  • (a) "Too many" means "not socially optimal." Since the oceans are a commons, ocean fisheries are subject to unsustainable congestion (over-fishing) when access to ocean fisheries is unrestricted. This means long-run ocean fishery stocks will end up depleted since each fisherman does not bear the full cost of his fishing activity (that is, there exists a direct negative externality). Depletion of resources leaves everyone worse off. Restrictive quota systems with tradeable quota allocations (i.e., the introduction of restricted access with well-defined property rights) have proven effective in addressing over-fishing.
  • (b) Married couples who must pay a babysitter have a higher fixed cost than couples who do not have this fixed cost. Therefore it is more likely that couples choosing between spending $20 on a movie vs. $40 on a theatre performance (without children) would be more likely to choose a movie night out, than couples (with children) choosing between $35 and $55 respectively. The fixed cost contributes to the marginal (opportunity cost) decision between the two sources of entertainment. in the first example movies cost half of a play. In the second scenario movies cost 7/11 (64%) of a play. Movies are relatively more expensive (in terms of plays) to couples who must pay a babysitter.
  • (c) Laissez-faire capitalism does nothing to contribute to the morals of society. It only allows people to exchange via price instead of other less efficient mechanisms. In repeated interactions people have to be truthful, honest, and faithful. If this type of capitalism prevails consumers can choose to frequent shops where these values are part of the price of the item. For example, sellers on Amazon.com have records of past interactions with customers. In an effort to minimize complaints the seller will often go out of his way to make amends for disgruntled customers. This raises the costs of operating a business. A customer has the choice to be price sensitive and take a risk, or pay a slightly higher price for a seller who has demonstrated honesty and faithfulness. Only when the cost of honesty and faithfulness are very high would we expect to see them cease to exist, and then only if the market is very underdeveloped.
  • (d) Property rights can internalize externalities if they are clearly defined. For example, ownership of a whole river could internalize pollution of that river, but the definition of these rights could be ambiguous. Government ownership of land could be a solution, but political and agent problems would still persist.
    • Property rights also designate the rights to use, extract surplus value and transfer resources.

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