What are the reasons that are usually given to justify regulation?
These are among reasons offered to regulate an industry:
1 . The industry may be characterized by economies of scale and/or scope. If so, there are cost advantages to having a single firm produce the entire industry output. However, such a monopoly might abuse its position and charge high prices. To obtain the cost advantages without the price disadvantages, regulation may be proposed.
2 . A particular good or service may be seen as essential, and universal service for all may become an objective. In order to provide service to all at a uniformly low cost, a firm will need to cross-subsidize-charge prices that are above or below the actual cost of service. Such a firm is vulnerable to new entry, which seeks to "cream skim" where prices are higher. Therefore, part of regulation in such industries includes limit or prevention of entry.
3 . For some industries there may be self-destructive competition. This can occur if there are large economies of scale with high fixed investment-as in the case of railroads. Rate wars that push prices down to cover only marginal costs result in long-run destruction of the industry unless regulation of rates prevents it.
4 . Consumers may be misinformed or cheated by firms, or there may be environmental damage from some firms. This is not a justification for price or rate-of-return regulation, however.
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A firm is considering using its own funds to finance an investment, but needs an estimate of the discount rate. Currently the firm is earning 4 percent on funds held in a bank account and 6 percent on funds held in stocks. If the firm has 20 percent of its funds in the bank account and the remaining 80 percent in stocks, what is the firm's weighted average cost of capital?
A) 5.8 percent B) 4.2 percent C) 4.4 percent D) 5.6 percent
Producer surplus is
A) the total difference between the total amount that producers actually receive for an item and the total amount that they would have been willing to accept. B) the total difference between the total costs firms incur in producing an item and the utility consumers derive from purchasing the item. C) the total difference between the total amount that consumers are willing to pay for an item and the total amount that producers would like to receive. D) the total difference between the utility consumers derive from purchasing an item and the total costs firms incur in producing the item.
For which of the following environmental issues is property rights most relevant?
a. Greenhouse gas emissions b. Acid rain c. Endangered species d. Fresh water resources
Consider the following statement, "The Federal Reserve fights recessions by increasing the money supply so people will have more money to spend." What is wrong with the statement and how can it be corrected?
What will be an ideal response?