*1. (30) Read the weblog postings on the new Indiana realtor law at the end of this test.
(a) (0, 5, 10) Who gains and who loses from the new law?
Answer. Full-service realtors gain. Discount realtors and buyer and sellers of houses lose. I gave full credit even if you did not note that both buyers and sellers of houses lose.
(b) (0, 5, 10) Illustrate the extent of lobbying on this bill using a reaction curve diagram of the kind in the Becker model.
Answer. This would be the Becker diagram you can find in the text, but labelled to fit this situation, and showing that the old realtors would exert the most pressure in reaction to what consumers exert. To illustrate something you have to show how a diagram connects to it--- just labels of "1" and "2" doesn't do that. I did give partial credit for just copying the diagram from the book, though that really just illustrates your ability to use the index.
(c) (0, 5, 10) Is the new bill consistent with Peltzman's prediction about the relation between concentration and regulation? Explain.
Answer. Yes, he predicted there would be most regulation if the free market resulted in either monopoly or high competition, and here it starts with high competition and ends with regulation.
(a) (0, 5, 7) What pollution outputs for the three firms maximize total surplus?
Answer. 15 for A and B, 20 for C. I also gave full credit for the answer of reductions of 5 for A and for B and of 0 for C.
(b) (0, 5, 7) Why would we expect the Coase Theorem to fail here?
Answer. There are too many vacationers downriver. Each would like to be a free rider, and have the other vacationers pay, or, if they hold the property right, to have the firms pay them a bigger share of the price for being allowed to pollute.
(c) (0, 5, 8) What is the optimal pollution tax?
Answer. $10/ton, equal to the externality cost.
(d) (0, 5, 8) What would happen if each firm were given tradeable licenses to pollute up to 8 tons each?
Answer. Firms A and B would buy 4 tons of licenses each from firm C. Firm A would pollute 8 tons, Firm B 8 tons, and Firm C 0 tons.
3. (0, 10, 20) Explain why some industries are natural monopolies, and why price controls might be appropriate for them.
Answer. If average cost is decreasing, an industry is a natural monopoly. It is not possible for firms to charge price equal to marginal cost and survive. Only one firm will survive, and it will charge the monopoly price if unregulated, which will cause the usual triangle losses. As a result, a price control at a lower price would raise surplus.
4. (0, 10, 20) Two ways to regulate information are to require disclosure and to mandate high quality. Give an example of each, and explain which kind of regulation would be surplus-maximizing in each case, and why.
Answer. An example of requiring disclosure is to require cereal boxes to say how much sugar is in the cereal. This is more surplus-maximizing than banning sugary cereals, because some people do want sugary cereal, even though other people do not. An example of a quality mandate is the requirement that car bumpers be strong enough to withstand a small collision. This is surplus-maximizing because almost nobody would want to buy a car whose bumper was so weak that it could not withstand the size of crash in the mandate.
5. (20) Give short answers to each of these questions.
(a) (0, 2, 5) In rate of return regulation, should an electric utility's allowed rate of return be higher than that of the average stock, lower, or the same?
Answer. Lower. Utilities are less risky, with lower betas, because demand is less income elastic than for most products.
(b) (0, 2, 5) Explain the phenomenon of "anchoring".
Answer. Anchoring occurs when someone lets clearly irrelevant numbers affect his answer to a question, e.g. increasing his estimate of lawsuit damages when the plaintiff says it is 8 trillion dollars despite lack of evidence, compared to when the plaintiff just asks for $5,000.
(c) (0, 2, 5) What is the greatest difficulty for the proposal to control global warming by imposing a tax on all emissions of carbon dioxide?
Answer. The biggest problem is getting countries to agree to impose the tax, not just because of the free rider problem, but also because some countries would lose from the proposal because they do not gain enough from controlling global warming.
I also gave credit for pointing out other major problems for such a proposal.
(d) (0, 2, 5) If American firm X switches from hiring American firm Y to supply telemarketing to using Indian firm Z, is the gain to X greater than the loss to Y, or less?
Answer. Greater. Suppose X gets a price N dollars lower by using Z. If Y reduced its price by N dollars, it could keep X's business. Thus, the biggest loss Y could be suffering is N dollars per unit lost. But Y was not willing to reduce its price by that much, so Y can't be losing as much as N dollars per unit by losing X's business. X must be gaining more by switching than Y loses.
From Advance Indiana (http://advanceindiana.blogspot.com) on March 19, 2006:
"... a new law which quietly made its way through the Indiana General Assembly and was recently signed into law by Gov. Daniels. The bill, HB 1339, will effectively shield traditional real estate agents from competition they are now getting from low-cost agents.
Patrick Woodall, a senior researcher with the Consumer Federation of America...
"At the urging of traditional real estate brokers, the Indiana legislature quickly and quietly passed a bill that would make homeownership even more expensive. House Bill 1339 requires all real estate brokers to provide "minimum services." This seemingly innocuous change is an attempt to protect brokers' 6 percent commission from market competition. Unfortunately, Gov. Mitch Daniels signed this anti-consumer bill.
The change will require real estate agents to provide a full set of services -- marketing the home, receiving offers from potential buyers, sales negotiation and handling closing procedures -- even if the homeowner doesn't want or need these advisory services. It is an attempt to prevent consumers from accessing a range of new, lower-cost real estate models.
New brokers, for a much lower fee, will market homes in the multiple listing service and provide marketing support but allow the homeowner to handle everything else -- show the house and negotiate the closing -- or hire a different party to provide those services. For example, many homeowners have turned to for-sale-by-owner services, which provide little more than a multiple listing and a yard sign . . .
In other services, new business models using the Internet and technology brought improvements years ago -- such as in securities brokerage and travel -- but the changes are only beginning to affect the real estate industry. Rather than embracing market competition, industry leaders are attempting to use government to preserve the old model and prevent consumers from using less expensive real estate services. Similar efforts to limit competition from Internet real estate brokers drew a Justice Department antitrust lawsuit against the National Association of Realtors. And the same effort is behind the Indiana legislation."
HB 1339 was sponsored by Rep. Tim Harris (R-Anderson) and Sen. James Merritt (R- Indianapolis). It passed the House on a 56-38 bipartisan vote, and it passed the Senate unanimously. Even some traditionally pro-consumer legislators in the House sold out to the realtors lobby, including Rep. Bill Crawford (D- Indianapolis), Rep. Matt Pierce (D-Bloomington), Rep. Clyde Kersey (D-Terre Haute) and Rep. Peggy Welch (D-Elletsville)....
Advance Indiana wonders just what impact this new law will have on Indianapolis- based Homeyeah.com. Their fees are 40%-90% less than the traditional real estate brokers' fees. As it describes its services, "Our proprietary business model and technology allows buyers and sellers to take more control of their transaction without sacrificing necessary information and licensed professional guidance at critical points during the transaction process.
posted by Advance Indiana at 2:22 PM"
Then, on March 22:
"When the new law takes effect on July 1, 2006, it will impact HomeYeah's Market + product the greatest according to Slimak. For a flat fee of $499, a homeseller can market their home through HomeYeah, plus have their home listed on the Multiple Listing Service (MLS), which is managed by the local board of realtors. This requires the homeseller to offer the buyer's real estate commission (i.e., 3%-3.5%), while paying HomeYeah only the flat fee of $499. The Market + service represents 62% of HomeYeah's existing business.
As of July 1, 2006, Indiana's "Realtor Protection Law" will bar HomeYeah from offering this service. That's because the new law mandates that a selling agent provide a minimum amount of services in order to accept a fee for their service, such as marketing the home, receiving offers from potential buyers, sales negotiation and handling closing procedures, even if the homeowner doesn't want or need these advisory services. If a homeseller wants to utilize HomeYeah's services, it will now be required to purchase a much costlier service for $1,999, regardless of whether the homeseller wants the additional services....
Slimak could not understand how Gov. Daniels could sign a law that is so harmful to consumers and his industry. Advance Indiana suspects that an early announcement of support by the Indiana Association of Realtors for Gov. Daniels' Major Moves initiative may have shaded his thinking on this legislation just a wee bit.
posted by Advance Indiana at 2:57 PM"