EEP100 – Lecture 12

EEP100 – Lecture 12


We’re back againÉthis is lecture 12. Blogging!
If you haveÉyou might have noticedÉsome of you might have had your posts
put up (I recognize your face). I’m putting up little pictures of peoples’ faces.
Ew! Sorry people are going to see you in life.
Go complain to the university about your profile photos. For people that are like
“photo not available”ÉI’m going to put interesting stuff. I’m looking forward to that.
So there’s been some very good feedback from other readers on the blog. I
encourage you guys to give feedback on each other, because most of my readers
don’t talk about opportunity cost and marginal cost everyday. You guys should
know more about that. There’s 10 of them posted so far; I’m going
to do two every day until I run out. So that’s some cool stuff. Office hours. Normal
hours today. Not on Thursday at all. I’m going to be out for a medical thing, and
hopefully I will not die, and I will see you guys next Tuesday. And on next Tuesday, I’ll
have double time office hours probably fromÉI usually start at 12:30. Does anybody
have any idea besides 12:30 till 2:30? Does anybody have any preference for a different
hour? No? The midterm will be next week on Thursday.
After four? After four? Anybody else for after four? Hold
on let’s do a vote. Let’s do 1:30-2:30 versus 4:30
This is Tuesday, and Tuesday only. These are my office hours. The GSIs do their
own office hours. 4:30 to 5:30? Is this the nomination for the
afternoon? Okay. Afternoon? Wow. Maybe I should just cut this first hour and
put it all in the afternoon? No, okay. This one here? This extra hour here?
Nobody cares. Okay, I’ll do one at 12:30, and I’ll have another office hour at
4:30, yeah? Okay great. In terms of a review session, I don’t have any problem
with that. Okay so your homework is due on Thursday (your
homework 2). I looked up in case there was likeÉjoy or rapture on anyone’s
face. Any questions on homework 2?
Three? Three? What’s 3c say?
You have to do the marginalÉ You have to do marginal stuff? EwwÉis that
using the labels for the areas of both graphs? Where am I looking? Oh, this one here.
Oh that’s awesome. That’s so easy I’m not going to even help you with that.
Help each other. Okay, any other questions about other stuff
that’s not related to the homework? Are you going to give us a study guide for
the midterm? No. What we talked about. I have thought of
some very devious ways of making sure I ask you questions about everything
you are supposed to have read. The Hayek, those guest lecturers.
And those of you who are asking about YouTube lectures being posted? I don’t have
very much control in terms of when they show up on YouTube. I have done my job,
my side of things, in terms of getting them to ETS. So the video lectures are up toÉI
think last week is not posted. Does anybody know? Does anybody care?
The audio is always posted, as far as I’m concerned. Because I post those.
Any other stuff? Will we go over the readings in class or [inaudible]
Most of the readings are on your own. If I ask you something, it should be a pretty
bloody huge theme. I didn’t mean in terms of the midterm, I mean
as a general interest discussion. Hayek is obviously coming up (off and on)
the information paper. And when we doÉI don’t even know if IÉwhat did I assign?
CoaseÉ Coase, Hardin, and GordonÑwe will talk about
those. I will talk about those in lecture. And if the GSIs decide to do it in
their discussions that will be fine. The GordonÉin fact all three of those pieces
(Gordon, Coase, and Hardin) are pieces that address the issue that you guys learned about
when you did the experiment with the fishery. With the candy? Remember thatÉwiping
out the fishery example? All these three guys talk about the theory of
overcoming those kinds of tragedies of the commons.
And of course The Logic of Collective Action (the book that you will be finishing after
the midterm, as in starting after the midtermÉby mid-November, by Thanksgiving),
that book addresses the same topic. So we’re going to have a lot of time on group
dynamics and things like that and that kind of game theory.
Is that a good answer? Other question? Yeah? So we need to know the paperÉwhat about the
novels? Are they going to be on the test?
Yup. In a sense ofÉyou should’ve read them. And the question that I ask will be so
big that if you read it, you won’t have a problem. If you didn’t read it you’ll be like
woahÉwhat’s this economics stuff? Is the midterm going to be more like homework,
or more like lecture? They’ll be more likeÉwell like the lecture
is chaos. NoÉthere will be some problems that will look a lot like the homework, and
there’ll be some problems that don’t. But it will not be essays, because it’s impossible
to grade essays very quickly. I’m justÉindifference to my GSIs life expectancy.
I’m not going to do that. How many questions do you think it will be?
I’d takeÉmaybe an hour and 20 minutes worth of questions. Any other questions?
No? Okay. You can neverÉyou just show up, you take it, it’s done, right? It’s just
like everything else. Right, so I listened to Claire’s talk in order
to create devious questions for you, and what are the two things that she said are
necessary for markets? What’d she say? Property rights?
Okay, that’s a good one. Somebody had a question in the audience that was
likeÉyou have to have a legal system, which isÉyou have to protect the property
rights. But definitely property rights. And? Difference in value?
Difference in value, okay great. And then what’s the thing that can inhibit or destroy
a market from showing up? Transaction costs?
Transaction costs, right? Yeah. It’s too hard. I was actually moving this weekend. If
I stumble a lot it’s because I haven’t been sleeping very much. But the guy that was
helping me moveÉI said, “Oh I have these three extra cardboard boxes.”
“Oh, put them on Craigslist, for free.” I was like noÉI’ll just put them on the curb.
I mean the transaction cost of me putting it on Craigslist to get a phone call
from somebody who’s going to come up to my place and get three empty cardboard boxesÉit’s
unbelievable, right? Forget my time. Oh, it’s a photo of a cardboard
box you can get for free. So I just put them on the curb. So that is where I didn’t
have a market transaction. Or even worseÉI could’ve tried to sell them for a
dollar, and then someone’s trying to find me to spend a dollar, right?
So transaction costsÉin kind of a vague senseÉthere’s a big categoryÉlike utility.
You can put a whole bunch of stuff into transaction costs. But that can inhibit the
formation of a market. Now she mentioned something about market failure or
government failure. Did she mention government failure or did
she mention market failure? Does anybody remember what she mentioned?
If you don’t rememberÉwhat is market failure. Somebody tell me what market
failure is. It’s very popular in the political classes to talk about market failure.
What does it mean when a market fails?
You know? You don’t know? The market never fails for you? What does it mean
when a market fails? Inefficiency?
Inefficiency, but what kind of inefficiency? In supply and demand.
Okay, keep going, is it like a monopoly kind of inefficiency?
Not necessarilyÉit could be that there’s no demand for your marketÉ
Ah, that’s called a business failure. I’m not going to go with that one.
Or a missing demandÉ Not exactly. This is kind of like missing
markets and stuff like that. Let me try andÉ The thing to keep in mind is this difference
between private and social costs. So private and social costsÉwhat does it mean
when we have a market failure. And people who had their hands upÉkeep your hands
up if you want to. Externalities exist that result in people
not paying the full cost of their actions? Perfect. Externalities exist. Now what does
that mean? “Externalities exist” essentially means that if we have our aggregate
demand curve here, and we haveÉ Let’s just say we have this supply functionÉlet’s
just call this the marginal cost of gasoline.
Externalities exist because we say that the consumption of gasoline produces some
byproduct that is not reflected in the cost. So the pollutionÉso gas equalsÉlet’s just
call it “go”. You get to go. But it also produces pollution. So the consumer who’s
buying gas will say, “Oh look the price of gas is $3 a gallon.” And I’m going to buy
as many gallons as I want “Go”. So this is actually Q star. Now there’s a cost of pollutionÉdoes
that mean that the supply curve should be lower or higher in terms of
the additional cost of pollution from using gasoline?
Higher Higher. There’s this additional cost that’s
on top here; let’s just make it like this. I
mentioned last week that someone said that the cost of a barrel of oil should be
$300 if you reflect military spending and the cost of geopolitical risk. Not
geopolitical risk, sorry. Military spending. Right? $300 versus 100 and (what’s the
cost of oil right now?)É80? Or 70? So a much bigger number than the current price
of 180. So if we have this additional cost, that means every unit of gasoline out
there that’s consumed creates some pollution.
Now if there is nothing going on (there’s no regulation, there’s no intervention) then
the quantity produced is going to be Q star, and there’s going to be this much
pollution produced. And this is going to be an inefficient quantity of consumption.
Because if we did want toÉif we reflect the entire cost of consumption, we would
want to have a gas price that was higher. I’m just putting in $4; this is not actually
the quantitative measurement of how high it should be. But more importantly, the
quantityÉI’m just going to put a little E here for efficientÉwould be lower. So the
idea is that if you consume Q star, you’re producing pollution. If we take this
pollution into account by setting an efficient price, then the quantity consumed
would be lower. And that would fix the so-called market failure.
That’s just kind a straightforward explanation of about what market failure means.
Does that make sense to you guys? What does the word failure refer to?
A failure to achieve the efficient outcome. So in fact, although this might be a perfect
equilibrium here, it is the inefficient equilibrium, right? And that’s because it is the
inefficient equilibrium. And that is because of (essentially) this social cost of
consuming fuel. Now you can have market failure in different
ways. One of them is, for example, a pollution that produces a public bad, and
the other one might be thatÉ So the public bad is an externality. And when
it comes down to the externality falling on a particular individual or identify
a group of individualsÉthe cost is being born by those individuals. So it’s not necessarily
a public bad. I have to talk about property rights so that
we can draw this diagram. But say it’s a private bad that occurs to
one individual, then there’s actually the possibility of not having a market failure,
but having a, in a sense, market failure in a
bilateral way in a sense thatÉ So say thatÉthis is an overview concept that
I’m giving you. We’re going to be going over that that concept a million times.
Let me give you two examples. So one exampleÉyou’ve got your donut shop. And
they’re producing pollution. And this is a public bad.
So we want to tax their consumption of frying oil, or something like that, right?
This requires some form of governance, or some form of social intervention.
Coordinated intervention by a government body. Because a public bad is accruing
to every member of the public. It’s to everybody. And this scaleÉwe’re talking about this scale
that is essentially a transactions cost respective toÉit’s too hard to find every
person that’s being harmed. Too expensive. So you could have a public bad
in Berkeley, and there’s tens of thousands of residents there that are all suffering
from this donut pollution. Or it could be on
scale of California. Scale of the United States. Scale worldwide. What is the biggest
public bad going on right now? Greenhouses gasses.
Greenhouse gasses. Thank you. So greenhouse gasses, and as a result of
thatÉclimate change. Everybody’s pointing a finger at everybody else. This is a
market failure, and now we’re trying to solve it with a government intervention.
Maybe we’re experiencing a government failure, but that’s what this debate is all
about. Could you have a consumer driven market failureÉlikeÉbottled
waters and carbon oxides. So that could be likeÉ[inaudible]
Yes, that’s essentially a voluntary tax that the bottled water company is engaging in
to offset the harm of buying their product. Which is kind of like the bullet
manufacturer giving you an insurance policy for when you shoot your friend.
Fiji water does that. In fact, I think Fiji water is so green that they double offset
their carbon footprint. Which is of course water
that’s coming across the Pacific Ocean. I call that marketing. If it actually works
as advertised, it might be a way of overcoming that externality. I kind of hesitate
becauseÉremember this thing is about cutting consumption down, right?
So if your demand functionÉif you have aÉlet’s call it a varied inelastic demand.
And you raise the price by this much. Then you’re not reducing the quantity by very
much. And oh, I can actually just go like this. A totally inelastic demand, right?
And a totally inelastic demand is called “I don’t care about that price.”
If you don’t care about that price differential, then you actually don’t consume any
less. So that’s accomplishing nothing in terms of producing consumption. It is,
however, generating this block of money, which is theoretically going to do
something good, which is opposed to the block of money is actually supposed to
offset this amount of harm. And if the harm is greater or less, that’s
not the issue. That’s what they’re shooting for. But I’m not a fan of what I call indulgencesÉthe
idea ofÉyou buy your water and you pay a dollar extra so you can not
feel guilty about throwing your bottle of water away. Your empty bottle or whatever.
Good example. Okay so this is aÉpublic bad from an externality. But what
happens if the donut store just starts dumping oil on the neighbor’s lawn?
Is that a market failure? No. Is that an externality? Yes. Do we need a
government intervention to fix this? What kind of government intervention? We’ve got
property rights. We’ve got that legal system. Here’s our Berkeley farmer who’s upset
about the donut oil that’s spilled on his garden. And the government shows up and
says, “We want to intervene and help you.”
What kind of government intervention is going to happen? How does this get fixed?
This problem? Or maybe it doesn’t. Maybe you just get oil on the lawn. Anyone
else? Who hasn’t talked yet? You pay a fine.
A fine. Where does the money go from the fine? Does it go to this guy? It goes to
Sacramento and gets wasted. Can you sue?
Can you sue? Who’s suing? This guy, right?
He can sue. This is what the Coase paper is about. This is the problem of social cost.
Coase basically saysÉin the absence of transaction costsÉan amazing significant
caveatÉpeople involved in pollution can make agreements (side agreements) based
on property rights to mitigate the cost of an externality, all right? If you read the
paper, he says it probably a lot better. But the idea basically isÉwho has the property
rights here? What’s natural? Who’s stolen the property rights? The donut polluter
or the farmer pollutee? The farmer. The right not to be polluted on. Or someone
not to dump crap on your roadÉor your land.
So the rights belong to the farmer, here comes this oil, the farmer has the right to
say what (about the oil)? So the oil guyÉdoes he have the right not
to be polluted, or does the donut guy have the right to pollute him?
Not be polluted right? It’s fairly common sense, and there’s lot’s of different ways
to structure this.
But it’s fairly common sense that you have the right to not be polluted. Right? You
bought your landÉit did not involve an easement for donut, oil, clothes. So if this
guys got the rights then he can basically say, “You shut down.”
Now this guyÉhe’s going to do what? What’s he going to do? Is he going to shut
down his business? No. What are his options? What can he do?
Go open a store somewhere else? Right. Put it right here. What else?
Raise prices and figure out a way to get rid of the oilÉ
Right, no dumping. Change technology. That’s a delta for cange. And change of
technology implies there’s a higher cost method, right?
Because if there was a lower cost method that did not involve pollution, they
would’ve done it already, right? So costs will go up.
Pay the farmer to cover the costs of the oil. Essentially a side payment, right? That’s
what Coase said. Other hands?
Pay somebody else to clean it up. Pay to pollute. That’s actually the word that
shows up in the newspapers all the time. Or I’m going to put cleanup as aÉthat’s
the same idea. Cleanup as in change technology. That actually is going to raise
costs. Other hands? That’s pretty much it.
This is the one that Coase talked about. This happens a lot. Developed so-called no-
pollution havens. Pollution dumping. This is what ends up happening if this is
too expensive, right? If three costs more than two, usually, in a law-abiding society,
this isn’t going to happen. But two or three ends up being the kind of result.
Somebody wakes up in the morning and says, “Oh my god there’s all this oil here.”
Or “Oh my god there’s all this carbon in the atmosphere. Oh my god there’s smog”
Let’s fix this problem. And either you go to paying people to pollute or paying
people to do that kind of activity or changing the technology.
And there’s a business tradeoff between which one you decide to do. We’re getting
into this a lot because it’s a big topic in environmental economics. But I wanted to
bring it up in terms of what got tingled on in Claire’s talk.
So is it the truth that that is all [inaudible]Éeverything will be inefficient after they
pay for the farmer’s land to get cleaned up. Everything will be inefficient if these two
go into a negotiation to sufficiently lower transaction costs. That’s what Coase said.
But then in that case, let’s say he agrees onÉwe’ll only pay 300 dollars. The costs
don’t have to go up. Then people are happier because
now they get cheap donuts. And it’s not just with donuts, it’s for example with
cars. So then can’t you say that it’s also inefficient becauseÉ
No, it has nothing to do with inefficient. The price is the price. The price affects
cost. So some of the costs before were not reflected in the price of those donuts.
Isn’t there a social cost of unhappiness of people who now can’t go from place A to
place B? Yes, but everybody can complain about that.
I’m unhappy I don’t have a one-dollar Mercedes. I’m very unhappy.
So that wouldn’t count then? No. So what we do when we do supply and demand
is we say, “Hey, this is the surplus here.” But we want to make sure that
supply and demand are accurate ways of representing what’s going on. So this is
the sense that the supply curve should’ve been shifted up again.
Other questions? I have a related question after theÉ[inaudible]..what
is the goal of the group that the government wants to impose the tax on? Do
they look at the elasticity and think, okay do we want to impose a tax so the quantity
goes downÉand tax collected is equal to the amount of damage doneÉwhat is the goal?
Well that’s the theory. Let me just take an aside. I’m going to talk about this later,
but now’s the time. Let me talk about taxes versus regulations.
Okay so you’ve got yourÉlet’s call it a benevolent citizen group. And they’re
interested in endingÉsuch and such source of pollution. So let’s just take our
demand curve and here’s the supply curve, and here’s supply efficient and here’s
supply market failure. Let’s just call it that. So here’s the theory. The theory is
that they want to impose a tax that will be identical
to the cost so that the market transactions are efficient. That’s the goal.
So this amount here is a tax. So this is all tax revenue and the tax revenueÉyou
could either take it as the area under the sloping curve or out of the whole box here,
right? Either way. But the revenue was meant to offset
the cost of the pollution. So in the example of climate change, we will tax carbon,
and we will use the tax revenue to reforest areas or do carbon sequestration
or whatever. So that’s a very important thingÉwhat happens
to the money after it goes. There’s an interesting controversy in US politics
about taxing the cap and trade regime. And this is different cap and trade by the way.
But the idea is that if there’s some revenue it should be used to fund green programs
to increase energy efficiency. What they call a double play, right? You tax
to reduce the activity, then you subsidize the actual virtuous activity.
So then don’t you have to place a value on the virtuous activity?
Oh, absolutely. That’s determined by the tax. Calculating that is the alchemy right?
It is very hard to calculate those things. Isn’t that a flawed idea?
It’s a flawed ideaÉwell the idea, the theory is sound. You should make it cost more.
How much more? What if this isÉokay let me just throw out this idea again. If this is
the market supply curve and our price hereÉand one our geniuses calculates this
number hereÉand that’s the taxÉbut really it should be bigger, right? If it really
should be bigger you have an inefficiently high level of pollution.
If it should be smaller, than you have an inefficiently high level of taxes. So
pinpointing that exact tax is actually impossible. But that doesn’t mean they’re not
going to try. And more importantly, I think the idea is that you want toÉI mean I’m
a big believer in terms of feedback loops on taxes, so if you have a targeted level
of emissions or pollutions or water quality,
air quality, or whatever, if the activity is
still producing too much of that bad, you just raise the tax. So your tax will go up
and down depending on how much bad is going on. And then you don’t have to be
so precise about your calculations on the first go. That’s called Basian updating for
the statistical geeks in the room. I have no idea how to use it, but I just know
it’s called that. So now the alternative is that there’s a regulation. The regulation
looks at the same example and says, “Well, forget that tax stuff, let’s just make these
people use less.” We’ll have a limited number of permits or rights to use that item.
We can call this anything. It could be called tax, it could be called carbon, it
could be called housing developments, parking licensesÉany of those things.
This is the worst diagram ever. I hope you’re not just copying it down. Make good
notes though, about this diagram. The idea is that you regulate what? Quantity.
You regulate on quantity, and over here you’re regulating on price. That’s actually
the big difference between these two ideas. Now there’s this other type of regulation
calledÉyou’re not allowed to sell leaded gas, you have to sell unleaded gas. But you
have toÉthe idea is essentially similar. If you regulate the quantity, then do you
still have to sell it for the old price? You regulate the quantity, and then you watch
whatever happens to the price. Because in market equilibrium, you can set
price, and quantity will be an outcome. Or you can set quantity, and price will be
an outcome. But you can’t set both. This is actually extremely important because
very few people, besides economists, and by that I mean you guys, understand that
you can’t set price and quantity at the exact same time.
I did my dissertation on the Metropolitan Water District. And they try to set price
and quantity a year ahead of the market. And then they hope that this happens.
They hope. They don’t actually know what supply or demand look like, but they try
and set price and quantity. So that’s kind ofÉyou knowÉit’s good employment for
economists; they’re doing assessments for them, but they’re wrong almost all the
time by definition. So in regulation, you’re either messing with Q or messing with P.
Taxes. Is there a deadweight loss associated with
regulation? Because taxes is actually a revenue that goes with the government. Whereas
regulation just doesn’t happen. Right, regulation isÉThat’s a very important
and correct observation. The taxes produce revenue. This box hereÉokay, so this
taxÉthere’s P and there’s tax. This taxÉdoes this have any impact on social welfare?
That tax? Who thinks yes? Who thinks no? Well all the “yes” people are wrong.
This has no impact on social welfare. The deadweight loss triangleÉyes, that has
impact. This is merely a transfer. It’s a transfer of surplus from producers (it’s from
their surplus triangle) and consumers (their surplus triangle) to the government,
which will then do something very wise with that money.
And it may not go back to these producers or consumers. It’s meant to go back to
those who are harmed by pollution. If it goes into the congressional junk it to
Bermuda fund, then it may not all be wasted, but some of it will be wasted in terms
of social outcomes. Sometimes isn’t a tax better than regulations
because [inaudible] In one sense taxes are better than regulations
because the money is quantified. The deadweight loss is the same in both circumstances.
But in this circumstance, you’re just inhibiting activity. But more interesting
is that taxes are more transparent. When you see the tax, you see the tax. With
regulations, you’re not quite sure what’s the extra cost.
That, ironically, is why cap-and-trade is much more popular with politicians,
because they don’t want taxes to be visible and regulationsÉthe cost of
regulationsÉthere was an assemblyman of California who I quoted in my blog. And
he said, “California” (they have a cap and trade rule in California called AB42) “yes,
we know it’s going to cost a hundred times more than the carbon tax, but at least
people won’t see any of these costs.” That was a quote from a politician. Now that’s
evenÉthe benevolent side of the politician. Because if you’re doing a tax,
you realize that every unit is going to have a
revenue associated with it. When you do a regulation, you can write those
regulations lots of different ways. Exempting ranches that are greater than a
hundred thousand miles located in Montana (Ted Turner, campaign donor). So regulations
have
a lot more area for negotiation among politically active groups
that do not include you (citizens) right? That’s for special interest groups, the lobbyists.
The 60 thousand DC lobbyists. The carbon tax is not an effect on social
welfare because the valueÉyou wouldn’t get the deadweight lossÉ
Oh, they absolutely do have an effect on social welfare. I was going with this triangle
here. That was a trick question. This is the deadweight loss. That’s true. This is
nominally not a deadweight loss if it is spent efficiently to offset the actual cost. It
goes into the black hole of corruption, and it’s also deadweight loss in a sense.
That’s why some people say, “Don’t even have taxes, I’ll still have government.”
Right? So regulations, producers just lose the moneyÉ
It just increases the cost. And in that senseÉthey willÉthey’re producing a higher
supply function andÉso there’s the deadweight loss, and they’re havingÉ
So their surplus was…let’s do this bigger, because I do want to figure out what the
producers are losing. So there’s our original cost curve, there’s demand function.
we essentiallyÉlet’s just do the tax this wayÉ
But for regulations, don’t youÉwouldn’t the priceÉI mean for regulations why would
the cost go up? Would they just say that you can only sell that much? They don’t tax it,
so the cost stays the same. It’s just that now everybody who is in that market actually
likes it because it’s a monopoly. They make the same stuff but they can sell it for
higher prices because there’s less supply, and they’re not allowed to make more.
Right, but there’s different ways of doing it. So the scenario you’re talking
aboutÉyou’ve got demand and supply, and the government just says you can’t sell
more than that. Okay. So now we have this supply function; it kind of goes like this.
And you could have the price jump up just like you said. And they lose A, they gain
B. Consumers lose C and B in terms of their surplus. That’s if you just cut it off. The
problem is at that price, you’ve got all these guys who want to be producing for the
market. So you have, somehowÉnot just to choke it down from Q, you have to choke
down supply. Not just from Q star to Qe. You’ve got to choke out all these guys too
in some wise and benevolent wayÉdecide who gets to produce for that market.
That’s what comes into what I was mentioning about cap and trade. that’s where
you get the lobbyists showing up saying, “Oh, give me the production license
because we print stuff on recycled paper. So we need the million dollars worth of
subsidy.” Well it’s not a subsidy; it’s market access.
So this is very much a dynamic for market regulation. What I was doing here is
just kind of benevolently assuming this was going to happen. And there was no lobbying
going on. So treating the regulation essentially like a cost. But this
isÉuse this for the deadweight loss of the regulation. And the taxes are what I have
left. So the deadweight loss is B and A right?
This is a CÉbut yesÉC and A. And what does it look like when consumer surplus
decreased? Consumer surplus decreased. In this example?
Yeah. Consumer surplus used to be C plus B plus D.
[student comment] No, above the price. Consumer surplus. Is
that the question you’re asking? Oh, so producer is on the bottom.
Producer is on the bottom. So why does it say producer surplus? Why doesn’t
it increase? It did increase. Because essentially the governmentÉI
mean this is a different way of doing regulations. In this case we’re just
cutting back on quantity. Just like a monopolist would want to. This is why a lot
of industries ask for regulations. Please regulate us. Remember the please don’t throw
us in the brier patch? Anybody seen that? What’s that movie? Please
don’t throw me in theÉplease don’t regulate me! Oh don’t regulate me! And thenÉoh
those regulations are wonderful because usually it’ll keep out an entry. It’ll
keep out competition. Okay so the producer surplus increases by the quantity
B and falls by the quantity A. And B, let’s assume, is greater than A.
So why doesn’t it fall by C as well? This is consumer surplus, just lost by the
production and quantity. NowÉtheÉthis segues perfectly into what
I want to talk about with profits. Because in the short runÉshort run profits. Are the
greater than zero, equal to zero, or less than zero. Who thinks they’re greater than
zero? Equal to zero? Less than zero? Less than zero. Yay.
In some ways they can be any of these. But the one that we talk about most often is
that short run profits are positive. They can be equal to zero just because. Because
we’re adjusting, right? If you’re a firm and you’re adjusting your enterprise, and
you’re like, “Oh my god, we’re selling below costs; we better raise our prices.” That’s
just a fact of running a business. And they might be less than zero because you,
again, miscalibrate. But in economics, we almost always assume this. Right? We
assume that short run profits are greater than zero. Because of what phenomenon?
Typically? Come on business people. Why would short run
profits be greater than zero? What happens in the long run?
Well if you have your firm just starting out, and if you’re very popular then a lot people
willÉbutÉa lot of people will want to enter your market as wellÉ
Entry, right? For entry. So long run profits equal zero. We assume in economics
they equal zero because of entry. If there is not entry, the long run profit of the post
office, the 200 plus year monopoly, is greater than zero although they continue to
lose money. Now how they’re usingÉso their financial profits might be negative but
their rentÉtheir happinessÉthey’re sitting around drinking coffee, losing your mail.
Those are greater than zero, okay? Because there is no entry against the postal
service in some segments. Obviously we’ve seenÉthey’ve lost packages, they’ve lost
most first class mail (in terms of e-mail) and a lot of business posts, right? But for
a competitive business, long-run profits are
equal to zero because of entry. Because firms come into the market and will innovate
to take away that profit from Apple or theÉCinnabuns or whatever. TheseÉ “Oh my
god, I can’t I’m eating a cube of butter.” That kind of stuff.
So until somebody come in and copies their business model, then that will be
positive, right? And it’s important to keep in mind that there’s two typesÉ
There are a lot of things that are affecting short run profits that like being positive.
Let me get to this one first, and then I’ll go to the other things on the list. One reason
is that there’s some form of regulation, in terms of law, protecting your market
share. You have got a temporary monopoly for a taxi driver in Berkeley. There’s
only whateverÉ120 Medallions in Berkeley? And you can’t startÉthere’s no startups
for taxi drivers. So you could have a form of a regulation that’s
protecting your short run profitability, being greater than zero.
It doesn’t mean that…there could be competition among the taxi drivers, but that
still will stop after awhile. And it will keep profits positive. The other one is
essentially an out of equilibrium path. No one knows what’s really going on, so
profits are being made, technology is hard to catch up withÉa local monopoly is
quite important. A local monopoly is going to be when you have
one donut shop here and one donut shop here, and essentially the marketÉ
If you’re standing here and you’re thinking, gee I want a donut. Maybe the
transaction costs are going over here. Well, let’s just say it’s greater than zero, right?
If the transaction cost is greater than zero, can this guy charge you a higher price?
Yeah, right? The profit is greater than zero. And likewise, over here, when people
are crossing this way. This is essentially a form of a local monopoly. Now if the
transaction costs fall, so that you can instantly go from donut shop to donut shop,
and there’s price comparison, then that monopoly profit will fall.
I’m going to the airport today, and I’m going to experience the Starbucks coffee
monopoly, right? You go there, you go through security, and it’s not like you’re
walking out to get coffee for a dollar less; you’ve got to deal with their prices. And
I routinely know prices of Starbucks coffee
cost a dollar more a cup after security, or when there is not another concession near
inside there. In fact my first and only successful business
in high school was selling candy. And there was a monopoly on campus selling candy
bars for 50 cents. And the Dean of Students and IÉwe conspired to defeat the
monopoly. And I had my only candy machine that wasn’t supposed to exist. Guess
what my price was? 49?
49Éexcept that we don’t do pennies, right? 45 cents. And I didn’t exist. It was
perfect because they didn’t knowÉthey were setting prices at a higher level in order
to reap in the monopoly profits. They didn’t realize that they had actually set a floor
below which I could go and take advantage of all the student demand. I bought a car
with that candy machine. Great deal. Wouldn’t it be easier though for the people
that have two quarters and theÉ I had change though in the machine. Except
it was shocking people. There was a little bit of a problem with that machineÉbut
it was 45 cents and maybe a shock. Okay so profitsÉI hadÉthis is not exactly
how I had my profits protected, but I wasÉthere was kind of like we were a duopoly,
right? It was me and this other guy. The other guy didn’t even know I was there,
so I was cutting his prices and taking some share of market potential. But students
would still buyÉI was selling Twix barsÉthey would still buy the 50 cent Twix
bar when? When would they buy it? More convenient.
Convenient, right? It was more convenient because, you know, I only had one
machine. This guy had about 12 of them. Candy, candy everywhere. So, if I don’t
want to walk more than 20 feet to get my candy bar then they wouldn’t get the
nickel. It was on the student union. Any other questions?
You were talking about how the short run is affected when you’re out of equilibrium
path? What does that mean? Out of equilibrium path means thatÉin an
economic sense it would that you obviously haven’t gotten to equilibrium. And
why haven’t you gotten to equilibrium? Potentially because not all the
firms have entered the market yet. Potentially because the consumers haven’t
found the best bargain, for example. So there’s a lot of reasons you’ll be out of
equilibrium, and, as I mentioned a lecture or
two ago, the world is out of equilibrium, right? Economists are the only people that
really assume equilibrium because it makes the math easier. So that’s a statement
you should walk out of here with in general. [inaudible]
I don’t know, you should go ask him? Accounting profits versus economic profits.
Have any yogurt shops gone out of business in the last year? Yes or no?
Well they’ve all had to convert to Yogurtland style. There’s no moreÉlike the
Pinkberry? They don’t sell it byÉ Yogurt used to be sold by cups, like a cup
for $3, now it’s 30 cents an ounce. So it’s all by weight.
Yeah, so now it’s a lot cheaper across Berkeley. But not all of them do that.
Except for Yogurt Park. The city of Berkeley has a yogurt price cap?
Or is it nowÉit’s competition because it’s transparent what you’re paying?
Competition. AhhÉokay. So that’s a good example of adjusting
to equilibrium. So someone switched over toÉthey probably had pennies
per whateverÉper ounce. And they said, oh look at our competitorsÑthey cut
the cost 3 bucks, and all the people were like: “Holy cow look at that!” Free yogurt
coupons. Any yogurt firms entering the market? Yeah? Okay so short run profits are
still greater than zero, apparently. Someone still thinks it’s worth starting a
shop. And there’s some shop in San FranciscoÉthe cereal? Has anyone seen the
cereal shop? We have it here too
Yeah, we had it, right? Who would go eat cereal at a store? You watch TV and eat
cereal. I don’t get that. But anyway, yogurt’s still a profitable business.
Okay so the good sideÉif profits are still greater than zero, it could be a sign of
something good or a sign of something bad. It could be a sign of something good
because you’re witnessing creative destruction; you’re witnessing competition. And
that essentially is benefitting who? Consumers?
Consumers. In the long run. In the short run, it benefits who?
Producers? Which producers? The ones whoÉno, forget
toxicology. Which producers are benefitting from creative destruction in the
short run? The one’s that have the awesome products,
right? I meanÉApple is making a killing on the iPhone. Who’s losing in the short run
for creative destruction? All other phone companies.
The other ones. The other competition to Apple. Remember the RAZR used to be the
shit, and now who cares about that. So creative destruction benefits some groups
and harmful to others. So you know who’s going to oppose it and who’s going to
favor it. So Motorola might oppose it by saying, “We
have to put a regulation saying that you can’t produce a phone if your company is named
after a fruit.” And then they’ll send some money to their congressperson right?
But on the other hand, some firms will fail to deal with creative destruction because
they’d rather just not do anything. That’s being the ever hopefully ostrich sticking
your head in the sand, or whatever, okay? And that’s also something calledÉwhat’s
it calledÉproduct line cannibalism or something like that? The firm doesn’t want to
innovate to destroy it’s own product lines. This is a known problem.
IBM had an issue withÉIBM came out with theÉApple came out with a PCÉbut IBM
came out with the PC, right? Around 1981. Back in the day. So the PC came out, and
IBM used to sell mainframe computers. And the mainframe people did not wantÉor
many computer people did not want personal computers because that would’ve
done what? Taken away market share.
Taken away their market share, making their life harder, right? So the people that
actually created the PC created it in a secret lab in Florida. IBM’s from New York.
And the rest of the company didn’t know about it because if they had known about
it, they would’ve squashed them in terms of internal politics. But for the company
as a whole, the PC was an amazingly good product, right? So the executive said yes,
take several million dollars and go for it and make the product. So there’s
opposition inside a firm to innovation. I’ll get back to the opposition inside a firm in
a second. Oh, I just skipped ahead of this stupid thing. Alright. I’ll go back to it.
I had a question about monopolies. If you should have a product that defeats everyone
else’sÉhow is thatÉbecause you’re kind of on the way to becoming a monopoly
because you’re beating everyone elseÉhow is that some firms are able to do that and
other firms are notÉthey’re not likeÉhow is that some markets are competitive and
some areÉ Give me an example.
Well like with Apple, because they have an iPod, everyone wants to buy it. And the less
otherÉlike Zune is just a lot less popularÉso it’s likeÉI feel like Apple is on the path
to becoming a monopoly, sort of? But if you have
anotherÉyou have a lot of companies that can sell more or less the same goodÉor
the same purpose then. So it’s a question of commoditization then,
is what you’re getting at. The idea that a product line will become a commodity out of
it after awhile. The profits will disappear. What’s an example of a product
that became a commodity? Okay so bottled water in a sense. Back in the 70s
or whatever, the only bottled water was Callistoga and Perrier. And they had a reasonable
marketshare. And it’s like $2 for a bottle of water and no one cared about drinking
bottled water. And then bottled water became a healthy thing
and the doctors are likeÉdrink 8 glasses of water a day. And a couple of companies
got in the bottled water business, and they’re selling EvianÉa big brand of
distilled water. And people are likeÉOh Evian, $2 a bottle. And the water companies
are like Holy Cow. I just read likeÉthe other dayÉNestle is opening a bottling plant
in Sacramento. They’re going to pay about like a dollar per thousand gallons of
water. They’re going to put in bottles and sell it for about a dollar, or two dollars
a gallon. So talk about profit margin, right? And the profits get eaten up in shipping the
water around in plastic bottles and things like that.
But basically, bottled water started to get like this lucrative monopoly area. Or not
monopoly, but lucrative in terms of profits. And more and more firms in and said, if
we just take water out of the tap and sell it to someone and make a fat profit, why
don’t we do that? And they did. They started bottling water everywhere. This guy
in New York, actually bottles New York tap water, and sells New York tap water in a
bottle for a dollar. Even though they cost likeÉa penny. So commodification of
bottled water that followedÉpeople go into Walmart and sayÉI’ll pick up a couple
cases of water. They don’t care about Evian or CallistogaÉor any of that shit. It’s a
commodity now. So the profits in that business have sunk
so far that the Walmart water profit per bottle is I think one penny. And we’re talking
about the cost per bottle might be whateverÉit might be 2 cents. So the profits
have been really squeezed out to almost nothing. And that’s what happens in
competition, right? In competition, there will be short run profits. There will
be rents. But the good kind of rents. Rents that are returns on innovation.
What’s another way of getting those rents? Monopoly rents? How else do you do
that besides competition and innovation? Using market or political powerÉ
Yes, I’m going to say not market power, but political power. So let’s talk about the
difference between short run profit greater than zero because of market power or
government power. Okay? Market power is going to be because you make
a better widget. Your widget sells for more. Government power is because your
government bans all your competitors. It doesn’t matter if you sell
crapÑyou’re the only business in town. Do you put patents under government power?
Patents are a form of government powerÉthat’s using government power. They’re
often explained as a way of protecting short run profits to benefit society. There’s a
question about whether or not that’s true. There’s a lot debate among economists
and legal scholars about whether patents are a good idea or not. They do protect
profits though. [inaudible question]
So the question is are profitsÉcan you raise prices and get more demand, in a sense?
Did anybody hear about that iPhone app called “I am Rich”? It was all fixed
costsÉsome dude sat in his living room and made a little gem, I guess, I didn’t buy it.
And it was sold on the Apple store for I thinkÉ$1000 or $999 dollars. And the
marginal cost of production was zero, right? And the entire point of having this
thing (in terms of psychology) wasÉI have so much money I can waste it to buy a
picture of a gem (I think it was). And there was demand for this product. And the
Apple store (in one of their worst moves) removed it because of a customer
complaining that he didn’t mean to be an asshole when he hit “buy”. Or an idiotÉor
whatever you want to call it. But that’s an exampleÉI mean if you sold the “I am
Rich” thing for $10, probably no one would buy it. But if you’re obviously so
wastefully wealthy that you can pay $1000 dollars then there’s demand. But that’s
not necessarily irrational because in my mindÉI look at this stuff as it fits into the
evolutionary psychology literature, which is that we have evolved to buy these so-
called positional goodsÉthese goods that put you in a higher position relative to
somebody else because of it’s direct connection with reproductive success. So I
wonder if any girls bought that. It’s like the guys who rev their engines going
by, the guys who buy the penthouse apartment (not the floor below)Éthose are
positional goods to show how big and bad you are. Donald Trump buys billboards
for his ex-girlfriend. Do you think art are an example for that?
In a sense, art is an example for that. But art also has an extremely limited market
almost by definition. Every piece is unique. And also art is in the eye of the
beholder. If somebody buys art just to show people how much money they have to
waste, then that’s exactly what’s going on. If they buy art because they love 16
million dollar paintings of sunflowers, then it’s aesthetics, potentially.
Would you say that every product that’s sold by the sameÉlike people who spend $200
on a pair of designer jeans that are made at the same shop with the same people as the
Walmart pantsÉjust for status? Right. It’s not just status, but that’s also
branding and membership in the community. Pepsi and Coke are just like that.
“Drink Coke. You’ll be cool like all of us in the Coke commercial.” Or Pepsi, which
is more coolÉfor whatever reason, right?
So people who are buying those colasÉif you sold a cola in a plain can that didn’t
actually say coke, or you had to drink it on your own in a room, it would lose it’s
kind of potency. In a sense of that price differential between Coke and a Safeway
Coke. Because as far as I’m concerned, they’re very similar.
So is that something where the demand goes up? Or demand curve is upward sloping?
ItÉno it’s not demand is sloping up. What’s going on? Demand is a relationship
between price and quantity. Right? What we’re doing hereÉare we affectingÉare
we moving up and down a demand curve? Or shifting it in and out? What’s shifting
it in and out? Tastes and preferences.
Tastes and preferencesÉso we’re actually creating a preference for this bling Cola.
There’s actually bling water. They have little gems and stuff attached to it. right? So
it’s shifting the demand curve out. What if the firm entering is prevented by
the government. For example in the healthcareÉthey get a lot of competitors
orÉwho are opposed to public doctors orÉ So this question is what if the firm is enteringÉthis
is a little bit off topic but on topic, so it’s good.
But it’s likeÉif a firm entering the market is actually the government, right? And the
government is already in the healthcare market through the Veteran’s
AdministrationÉor Medicare and Medicaid in some way. But the complaint is that
in a public option, then that will drive out private providers of either private
insurance or medical care. That complaint holds some water. It is valid.
The number one reason that it is valid is because of the possibility of cross subsidy
using tax dollars to subsidize medical service. Whereas the private business can’t do
that. Well it’s pretty well-known right now that for every private dollar in medical
costs…you know the government Éwhatever. Let’s just say _. The costs of public
health provision might be _ of the private cost of health provision. Let’s just do it.
Just saying. That’s the argument. Or drugs in the USAÉUS versus drugs (legal
drugs) in Canada. Oh, lets just go buy drugs in Canada and bring it back to the United
States. Now they can’t do that. Well that’s kind of stupid; they both come from
the same factory, right? The difference in those prices is because
of the system that those drugs are in. If you
start bringing back these cheaper drugs in the U.S. then you break down this system.
And in this circumstance of the public and the private, what’s going on is that the
public provision of medical care is either implicitly subsidized through property
taxes or financing discounts (you know the government borrows more cheaply that
a private firm), or they explicitly subsidize in a sense that these guysÉthe private
companiesÉif you have a hospital, a private patient will pay $100 for the procedure.
The public patient will pay $50 for the procedure, and the cost is 80. There is a
cross subsidy between public and private. So that is the main complaint of those
folks if it’s legitimate. If it’s illegitimate, then we’ll say, “Hey, just go.” But there’s
a legitimate economic complaint about that.
Okay that was a little side note. Where was I?
So the government power can support monopoly power that is greater than zero,
and if that’s so, we know that there’s going to be business out there that are
lobbying the government for protection. And the businesses don’t always need the
government to protect their profits. There’s such a thing as an oligopoly or a cartel,
and we’ll get into that more as the course progresses, but I wanted to quote Adam
Smith, the uber capitalist. I might have said thisÉI’m just going to
read it. It saysÉpeople of the same trade seldom meet together for merriment and for
diversion, but the conversation ends in a conspiracy against the public or on some
conspiracy to raise prices. Adam Smith is sayingÉthe individual hand is awesome, but
don’t let those guys in the same room with each other because they will conspire
against you. I mentioned this last week in terms of cartels. But that’s the gospel
from Adam. So that’s some stuff on profits. Now I was
actually on this thingÉI was trying to respond to something on Claire’s talk. So
she was talking about market failure versus government failure. What’s government
failure? That’s what I was trying to get to. What does government failure mean?
Is it like you can’t trust the currency because it doesn’t stay the same?
No. That is an actual economic failure, but that’s not what I’m looking for.
Would it be incorrectly pricing the externality in that case?
Yes. In a direct price senseÉthe tax sense. Is it something like a price floor whereÉ
Right, a price floor and ceiling is a little more accurate in terms of regulation, okay?
You can haveÉremember market failure is officiallyÉit’s the inefficient quantity of a
good. We’re at the wrong price. Either way, you get the supply and demand
crossing. So if you’ve got this situation going on, you could have a market failure
and the price should be higher. You could have a government failure anywhere you
want. You could just sayÉthis is the price here, and the government decidesÉwe’ll
we’re going to put a price ceiling on there. P upper bar. On that price ceiling you
have this much supply and this much demand. So that’sÉessentiallyÉ the
government has intervened on that kind of market, and intervention is producing a
higher priceÑPÉokay so this is actually a good point. So if that intervention is
restring the quantity available in the market because the government set’s it at P1
upper bar. What’s Pt upper bar? What is that? Why is that price there? Why is that
the actual price? What does it mean? What does that price mean?
Restricted quantity? It did restrict quantity. But why is Pt equalÉ
What is P2? Is it what people are willing to pay at that
price? Not what they’re willing to payÉit’s what
they do pay. In order to have a balance between supply and demand you’ve got to be
able to choke demand all the way up the demand curve, right? And you choke it.
You know the price is set. What’s P2 composed of? Anybody ever boughtÉrememberÉevery
once in a while they’d have a rush for some kind of fad toy at Christmas?
Like Beanie Babies or whatever? And the Cabbage Patch dolls? And the kids are
like, “If you don’t give me this, I’m going to kill you.”
And then the parents are likeÉI mean they have a movieÉArnold Schwarzenegger
was trying to find some toy or something right? What’s this P bar 2 equal to? The government
has restricted quantity demanded (quantity). They’ve restricted quantity by
setting this price cap. It is available at Pt,
but what is Pt equal to? It’s equal to cash plus transaction costs. What are those
transaction costs? You’re trying to buy a Beanie Baby, you go down to Toys R Us
and what happens? Sold out. You go to Toys R Us in El Cerrito. Sold out. You get on
the planeÉgo to ChinaÉ So what’s going to happen isÉyou’re going
to spend P2 in terms of waiting around, searching around, asking aroundÉthey’re all
transactions costs, okay? Information problems, timing problems, and usually we
just say it’s time spend queuing. Standing in line. The idea is that, yeah it’s
only $10 a ticket, but you have to wait in line for 4 hours.
So is it how like the football games tickets are?
Yes. Student rush? Free ticket! If you get in lineÉ
Can’t government failure also be likeÉyou thought they were regulating something,
but they weren’t actually regulating it? You, the demander, thought they were regulating
it? I guess soÉI mean..
Example? LikeÉI buy gasÉI think the government is fixing the problem with
pollution. Like that kind of thing? Yeah, or likeÉI think it was AIG that you
were talking about where you said they were like insuredÉ
I think that’s a complication of regulation. I wouldn’t necessarily call it government
failure right off the batÉlet’s just not call it government failure. That’s an important
example of how a regulation can really go sideways.
Would it be something in terms of football tickets. It’s sold out and it’s whateverÉ
400É so would P2 be the difference? Well, so you’ll have two markets. You might
have a secondary market for the tickets. That would be a pure price market. When you’re
dealing with a scalper, there’s no waiting in line. They’re there. They want
your money. It’s nice and simple. But they’re queuing up. Or they’re buying tickets
with these super computers on the 2nd day of sales. Or they know somebody that Billy
Graham presents or in tickets or whateverÉthey buy tickets from the back door?
There’s a number of reasonsÉ But then the scalper market is a relatively
efficient stub hub and all that stuff. I’m thinking about rent control. I’m going
to say the transaction costs cost something like 3 months. But once they’re in, they’reÉ
Yes. So once you’re inÉso this representsÉso this is the deadweight lossÉthis is the
producer surplus. This is the consumer surplus. And this is a transactions cost.
This transactions cost represents the capitalized value or the capitalized cost of
buying that thing. So for those three months of waiting, you’ll get access to this
price. But over the relative time period, you’re paying this price. Now if you stay
in the department for 20 years, then maybe you’re
going to make out, right? But then there’s other kinds of opportunity costs.
But in a sense, what we assume is that consumers are going to pay a good chunk of
surplus against that profit. And whether or not the breakeven for search
costs is one month or three years or whateverÉthat’s a good observation. Yeah?
Other questions? Sorry, what were the boxes again?
This is producer surplus, this is consumer surplus, and this is essentiallyÉI’m going
to call it transactions costs. So in that picture right here, where’s the
government cost? Is that Pb? The government is setting the price ceiling
at P1. The total price the consumers end up paying is P2. It’s P1 plus P2.
And those are transaction costs? Right.
So at Pt, there is no shortage? At Pt there is no longer shortage because
the cost has been high enough to reduce that demand.
I’ll say one more thing. The theory of the firmÉso what we talked about last
weekÉwe talked about the donut entrepreneur, and the coffee entrepreneur. Mr.
Donut and Mr. Coffee, okay? And the question was: should they merge into one
firm? Now that’s fine and simple and interesting, but this theory (this is not an
extension, but this is another angle of looking at firms) this question about the
boundaries of the firm, assumes that the firm is a monolith. It assumes that the firm
acts as an individual. Now who’s worked for anybody for a wage? Okay.
Did you notice that inside of that firm, loosely construed, was everybody on the
same team, with the same program, we’re all there together, we’re all profit
maximizingÉwe all have one objective function? Is that true? Or were there some
kinds of disputes inside the company about who’s doing their job or who’s working
hard enough or who’s the good manager, and this manager’s not producing much for
the firm. Does anybody notice those kinds of dynamics inside of the firm?
So that’s what I kind of want to point out to you as an existing situation. So here,
we blow this circle up, and we’ve got a bunch
of individuals, and they all haveÉso this is
a profit-maximizing firm. We assume that. But inside that, you’ve got a whole
bunch of profit max equals a function of U1, U2, U3, and so on for all the utility
functions for people in that firm. The profits of the firm are the result of
a negotiated outcome among all of the individuals working inside that firm. All
of those people have their own objective functions. Yes I want to get paid, no I don’t
really want to work. Yes, I want to sell that product, no I hate selling that product.
Yes, I’ll show up on Tuesday, but I’ll never work on Wednesday. I don’t like you,
I like that person. And so on. All of those utility functions are interacting inside
the firm. And there’s this kind of mish mash. The idea essentially is that we pay
you. We want you to be a good employee so you have extrinsic motivation and intrinsic
motivation. And that will produce a profit. But sometimes those utility functions
are in conflict. And the firm profit may not be as high as a result of that. I want
to point to that, and we’ll get very heavy duty into principal agent stuff, and I’ll
see you on Thursday. Homework due at the start of class on Thursday. I’ve got office
hours now.

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