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A level Economics: How Chicago school economists reshaped American justice

From The Economist

In recent years the antitrust division of America’s Department of Justice has gone on a crusade against corporate mergers, filing a record number of complaints in an attempt to stop the biggest businesses from getting even bigger. With few exceptions, these efforts have been thwarted by the courts. That it is so hard to get a judge to intervene in business reflects the work of an institution known more for its free-market influence on economics than the law: the University of Chicago.

Fifty years ago this autumn Richard Posner, a federal judge and Chicago scholar, published his “Economic Analysis of Law”. Now in its 9th edition, the book set off an avalanche of ideas from Chicago school economists, including Gary Becker, Ronald Coase and Milton Friedman, which passed into the folios of America’s judges and lawyers. The “law-and-economics” movement made the courts more reasoned and rigorous. It also changed the verdicts judges handed out. Research has found that those exposed to its ideas are more opposed to regulators and less likely to enforce antitrust laws, and tend to impose prison terms more often and for longer.

Links between economics and the law have long been studied. In “Leviathan”, published in 1651, Thomas Hobbes wrote that secure property rights, which are needed for a system of economic exchange, are a legal fiction that emerged only with the modern state. By the late 19th century, legal fields that overlapped with economics, such as matters of taxation, were being analysed by economists.

With the arrival of the law-and-economics movement, every legal question was suddenly addressed in the context of the incentives of actors and the changes these produced. In “Crime and punishment: an economic approach” (1968), Becker argued that, rather than being a balancing-act between punishment and the opportunity for reform, sentences act mainly as a deterrent: the literal “price of crime”. Harsh sentences, he argued, reduce criminal activity in much the same way as high prices cut demand. With the caveat that a greater chance of arrest is a better deterrent than longer prison sentences, Becker’s theorising has since been borne out by decades of empirical evidence.

Too steep?

In the movement’s early days, “the legal academy paid little attention to our work”, recalls Guido Calabresi, a former dean of Yale Law School and another of the field’s founding fathers. Two things changed this. The first was Mr Posner’s bestselling textbook, in which he wrote that “it may be possible to deduce the basic formal characteristics of law itself from economic theory.” Mr Posner was a jurist, who wrote in a language familiar to other jurists. Yet he was also steeped in the economic insights of the Chicago school. His book successfully thrust the law-and-economics movement into the legal mainstream.

The second factor was a two-week programme called the Manne Economics Institute for Federal Judges, which ran from 1976 until 1998. This was funded by businesses and conservative foundations, and involved an all-expenses-paid stay at a beachside hotel in Miami. It was no holiday, however, even if those who went nicknamed the conference “Pareto in the Palms”. The curriculum was extremely demanding, taught by economists including Friedman and Paul Samuelson, both of whom had won Nobel prizes.

image: the economist

By the early 1990s nearly half the federal judiciary had spent a few weeks in Miami. Those who attended included two future justices on the Supreme Court: Clarence Thomas (an arch conservative) and Ruth Bader Ginsburg (his liberal counterpart). Ginsburg would later surprise colleagues by voting with the conservative majority on antitrust cases, applying the so-called “consumer welfare standard” championed by the Manne programme. This states that a corporate merger is anticompetitive only if it raises the price or reduces the quality of goods or services. Ginsburg wrote that the instruction she received in Miami “was far more intense than the Florida sun”.

In a paper under review by the Quarterly Journal of Economics, Elliot Ash of eth Zurich, Daniel Chen of Princeton University and Suresh Naidu of Columbia University treat the Manne programme as a natural experiment, comparing the decisions of every alumnus before and after their attendance at the conference. They then use an artificial-intelligence approach called “word embedding” to assess the language in judges’ opinions in more than a million circuit- and district- court cases.

The researchers find that federal judges were more likely to use terms such as “efficiency” and “market”, and less likely to use those such as “discharged” and “revoke”, after time spent in Miami. Manne alumni took what the authors characterised as the “conservative” stance on antitrust and other economic cases 30% more often in the years after attending. They also imposed prison sentences 5% more frequently and of 25% greater length. The effect became stronger still after 2005, when a Supreme Court decision gave federal judges greater discretion over sentencing.

That researchers are turning the unforgiving lens of economic analysis on law and economics itself is a promising trend. The dismal science has come a long way since the heyday of the Chicago school. Thanks in large part to the empiricism of behavioural economics, it is less wedded to abstractions like the perfectly rational actor. This has softened some of the Chicago school’s harsher edges. But it will nevertheless take time for judges to modify their approach. As Mr Ash notes: “The Chicago school economists may all be retired or dead, but Manne alumni continue to be active members of the judiciary.” In courtrooms across America, Mr Posner’s influence will live on for decades to come.

A level Economics: Starting Fair and Dealing with Luck: Comparing Monopoly and Real Economies

 ChatGPT

Think about Monopoly, the game where you buy properties and compete to win. Now, let's compare it with how the real world works when it comes to money, businesses, and luck.

In Monopoly, every player starts with the same amount of money. This makes sure that nobody gets an advantage right away. It's like starting a race with everyone on the same line. This makes the game about skills and strategy.

But in real life, things can be different. Some people start with more money or better chances. It's like some players in Monopoly starting ahead with better properties. This isn't fair, and it's how it is in the real world sometimes.

In Monopoly, luck comes into play with the roll of dice and the cards you draw. Sometimes you land on good spots, and sometimes not. Luck can make a big difference in the game. Similarly, real life has surprises too. New inventions, what people want to buy, and unexpected events can change how well businesses and people do.

But here's where they're not the same. In Monopoly, luck only matters during the game. In real life, luck is just one piece of the puzzle. Real life is more complicated. It's not just about luck – it's about how things are made, what people like, and rules set by governments. All of these things make the real world much harder to predict than a game.

So, in Monopoly, luck follows the game's rules. In real life, luck mixes with many other things, making it more complex. The comparison between Monopoly and real life reminds us that the real world is unfair and trickier.

A Level Economics 54: Monopoly

Market failure arising from monopoly firms occurs due to the significant market power they possess, which allows them to restrict output, charge higher prices, and limit competition. This results in an inefficient allocation of resources and a loss of consumer welfare. Let's explore the market failures arising from monopoly firms:

1. Higher Prices and Reduced Output: Monopoly firms can set prices higher than their production costs due to the lack of competition. Since they are the sole providers of a particular good or service, consumers have no choice but to accept the higher prices. This leads to reduced consumer surplus, as consumers pay more for the product than they would in a competitive market.

   Example: A pharmaceutical company holds a patent for a life-saving drug. As the only producer, they can charge exorbitant prices, making it unaffordable for many patients in need.

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3. Inefficient Resource Allocation: Monopoly firms may not allocate resources efficiently to meet consumer demand. Their focus may be on maximizing profits rather than producing the optimal quantity of goods or services that align with consumer preferences.

   Example: A monopoly internet service provider may invest less in network expansion and improvements since they face limited competition. As a result, consumers may experience slower and unreliable internet services.

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5. Lack of Innovation: Monopoly firms may lack incentives for innovation and improvement since they face no pressure from competitors. Without competition, there is less motivation to invest in research and development or enhance products and services.

   Example: A monopoly operating in the telecommunications sector may not invest in new technologies or offer innovative services since they already dominate the market.

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7. Deadweight Loss: Deadweight loss refers to the welfare loss experienced by society when resources are not efficiently allocated. In a monopoly, deadweight loss arises due to the underproduction of goods and services compared to a competitive market.

   Example: A monopoly producing widgets may restrict output to maximize profits, leading to an inefficiently low quantity of widgets produced and consumed.

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9. Rent-Seeking Behavior: Monopoly firms may engage in rent-seeking behavior, using their market power to lobby for regulations and policies that protect their position. This diverts resources away from productive activities and undermines overall economic efficiency.

   Example: A monopoly energy company may lobby the government to impose regulations that limit competition from renewable energy sources, protecting its market dominance.

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11. Inequitable Distribution of Income: Monopoly profits may be concentrated in the hands of a few, exacerbating income inequality and wealth disparities in society.

    Example: A monopoly in the media industry may control multiple platforms and generate significant profits, contributing to media ownership concentration and limiting diversity of voices.

Government intervention through antitrust laws, regulations, and competition policies is crucial to address the market failures arising from monopoly firms. By promoting competition, governments can encourage innovation, ensure efficient resource allocation, protect consumer welfare, and foster a more equitable distribution of economic benefits.

A Level Economics 49: Market Failure

In a free market economy, the allocation of goods and services is determined by the forces of supply and demand. Producers decide what to produce and how much based on what consumers are willing to pay (demand), and consumers decide what to buy based on the prices set by producers (supply). The goal of a free market is to achieve an efficient allocation of resources, where goods and services are produced in quantities that match consumers' desires and preferences.

Efficient Allocation of Resources:

An efficient allocation of resources means that the available resources (such as labor, capital, and materials) are used to produce the right mix of goods and services that maximize overall welfare or satisfaction in society. In a perfectly competitive free market, the equilibrium price and quantity are determined where the demand and supply curves intersect. At this point, the quantity supplied equals the quantity demanded, and there is no incentive for producers or consumers to change their behavior.

Explanation of Market Failure and Efficiency:

In a perfectly competitive market, the free market equilibrium output is determined where the demand and supply curves intersect. At this point, the quantity supplied equals the quantity demanded, and there is no incentive for producers or consumers to change their behavior. This equilibrium results in allocative efficiency, where the resources are allocated to produce the quantity of goods and services that maximize overall social welfare.

Example of Efficiency at Equilibrium:

Let's consider the market for smartphones, assuming it is perfectly competitive. The equilibrium price and quantity are determined by the intersection of the demand and supply curves. At this equilibrium, both consumers and producers achieve the maximum possible welfare. Consumers benefit from purchasing smartphones at the equilibrium price, and producers benefit from selling smartphones at the same price.

However, market failure can occur due to various factors that prevent the free market from reaching allocative efficiency and maximizing consumer and producer surplus.

Examples of Market Failures:

1. Externalities: Externalities are costs or benefits imposed on third parties who are not directly involved in a transaction. If an activity generates negative externalities (e.g., pollution from manufacturing), the social cost exceeds the private cost, leading to overproduction and an inefficient allocation of resources.

Example: Suppose a factory emits pollution while producing smartphones, imposing health costs on nearby residents. The market equilibrium may result in a higher quantity of smartphones being produced, but the social cost of pollution is not reflected in the equilibrium price, leading to inefficiency.

2. Public Goods: Public goods are non-excludable and non-rivalrous, meaning individuals cannot be excluded from their benefits, and one person's consumption does not diminish the availability for others. Since private firms cannot exclude people from using public goods, they are typically underprovided by the free market.

Example: National defense is a public good. If left to the free market, firms may not invest adequately in national defense, as they cannot charge individual consumers for its use.

3. Information Asymmetry: Information asymmetry occurs when one party in a transaction has more information than the other, leading to adverse selection or moral hazard problems.

Example: In the market for used smartphones, sellers may have more information about the condition of the phone than buyers. This information asymmetry can lead to market failure, with buyers potentially paying more for a smartphone that is of lower quality than expected.

4. Market Power and Monopolies: When a single seller or a small group of firms have significant market power, they can set prices higher than the competitive equilibrium, leading to reduced consumer surplus and inefficiency.

Example: A dominant smartphone company may use its market power to set high prices for its products, limiting consumer choice and causing inefficiency in the market.

In conclusion, market failures occur when the free market fails to achieve allocative efficiency and maximize consumer and producer surplus. Externalities, public goods, information asymmetry, and market power are some of the factors that can lead to market failures. In response to these failures, governments may intervene through regulations, taxes, subsidies, or the provision of public goods to improve resource allocation and promote overall welfare.

A Level Economics 46: The Role of Regulatory/Competition Authority

Competition authorities and regulators play a crucial role in promoting competition and contestability in non-perfectly competitive markets. They use various tools and interventions to address market distortions, protect consumers, and create a level playing field for businesses. Here are some ways competition authorities and regulators promote competition in non-perfectly competitive markets, along with examples to illustrate their impact:

1. Antitrust Enforcement: Competition authorities enforce antitrust laws to prevent anti-competitive practices, such as collusion, price-fixing, and abuse of dominant market positions. They investigate and take legal action against firms engaging in these behaviors to ensure fair competition.

Example: The European Commission fined Google €2.42 billion in 2017 for promoting its own shopping comparison service in search results and demoting competitors, violating EU antitrust rules. This action aimed to restore competition and give fair visibility to rival comparison shopping services.

2. Merger Control: Competition authorities review mergers and acquisitions to prevent the creation of dominant market positions that could stifle competition. They assess whether mergers are likely to harm competition and impose conditions or block mergers if necessary.

Example: In 2018, the U.S. Department of Justice (DOJ) filed a lawsuit to block AT&T's acquisition of Time Warner, citing potential harm to competition in the media and entertainment industry. The court-approved the merger only after significant divestitures and behavioral commitments were made to maintain competition.

3. Market Studies and Reports: Competition authorities conduct market studies to identify barriers to entry, anti-competitive practices, and market inefficiencies. These studies inform policymakers and regulators, leading to targeted interventions to enhance competition.

Example: The UK's Competition and Markets Authority (CMA) conducted a market study of the online platforms and digital advertising market in 2019. The study revealed concerns about the market power of large platforms and led to proposals for a Digital Markets Unit to enforce a new code of conduct and promote competition.

4. Consumer Protection Measures: Competition authorities protect consumers by ensuring businesses provide accurate information, fair contracts, and quality products. They may penalize firms for false advertising or unfair trading practices.

Example: The Federal Trade Commission (FTC) in the U.S. has taken action against companies making false claims about health products, deceptive advertising, or unfair billing practices, aiming to protect consumers from misleading information and scams.

5. Price Regulation: In some industries, regulators may impose price controls or regulate profit margins to prevent monopolistic pricing and ensure affordable access to essential goods and services.

Example: In healthcare, governments or regulatory bodies may regulate drug prices or set price ceilings for medical services to prevent excessive pricing and ensure accessibility to healthcare for all citizens.

6. Promoting Market Entry and Contestability: Competition authorities may encourage the entry of new firms into the market to increase competition. They may also promote contestability by removing barriers to entry and fostering innovation.

Example: In the telecommunications industry, regulators may allocate spectrum licenses to new entrants to encourage competition and introduce new technologies, leading to improved services and lower prices for consumers.

In conclusion, competition authorities and regulators actively promote competition and contestability in non-perfectly competitive markets through antitrust enforcement, merger control, market studies, consumer protection measures, price regulation, and measures to enhance market entry and contestability. Their interventions aim to create competitive markets that benefit consumers, encourage innovation, and promote economic growth while safeguarding against anti-competitive practices.