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Microeconomics

R O G E R A. A R N O L D
CALIFORNIA STATE UNIVERSITY
SAN MARCOS

9E

 

 

  

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 Microeconomics, 9E © 2010, 2008 South-Western, a part of Cengage Learning
Roger A. Arnold ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon
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Printed in the United States of America

1 2 3 4 5 6 7 12 11 10 09 08
 To
Sheila, Daniel,
and David
Brief Contents

Preface xvii Part 5 Market Failure and Public Choice

Chapter 16 Market Failure: Externalities, Public Goods, and
An Introduction to Economics Asymmetric Information 380
Chapter 17 Public Choice: Economic Theory Applied to
Part 1 Economics: The Science of Scarcity Politics 406
Chapter 1 What Economics Is About 1
Appendix A Working with Diagrams 19 The Global Economy
Appendix B Should You Major in Economics? 27
Chapter 2 Economic Activities: Producing and Trading 33
Part 6 International Economics and Globalization
Chapter 3 Supply and Demand: Theory 53 Chapter 18 International Trade 427
Chapter 4 Supply and Demand: Applications 91 Chapter 19 International Finance 446
Chapter 20 Globalization and International Impacts on the
Economy 475
Microeconomics
Part 2 Microeconomic Fundamentals Practical Economics
Chapter 5 Elasticity 113
Part 7 Financial Matters
Chapter 6 Consumer Choice: Maximizing Utility and Behavioral
Economics 140 Chapter 21 Stocks, Bonds, Futures, and Options 503
Appendix C Budget Constraint and Indifference Curve Analysis 158
Chapter 7 Production and Costs 166 Web Chapter
Part 3 Product Markets and Policies Part 8 Web Chapter
Chapter 8 Perfect Competition 196 Chapter 22 Agriculture: Problems, Policies, and Unintended
Chapter 9 Monopoly 223 Effects 524

Chapter 10 Monopolistic Competition, Oligopoly, and Game

Theory 246 Self-Test Appendix 524

Chapter 11 Government and Product Markets: Antitrust and Glossary 538

Regulation 272 Index 544

Part 4 Factor Markets and Related Issues

Chapter 12 Factor Markets: With Emphasis on the Labor
Market 295
Chapter 13 Wages, Unions, and Labor 320
Chapter 14 The Distribution of Income and Poverty 339
Chapter 15 Interest, Rent, and Profit 361

iv
 Contents

Preface xvii

A n Intr oduc tion t o E c onom ic s

Part  Economics: The Science of Scarcity

CHAPTER  WHAT ECONOMICS IS ABOUT

A Definition of Economics 1
1

E C O N O M I C S 24/7 Goods and Bads 1 Resources 2 Scarcity and a Definition of Economics 2

LOST Key Concepts in Economics 5
3 Opportunity Cost 5 Opportunity Cost and Behavior 6 Benefits and Costs 7
Why Didn’t Jessica Alba Decisions Made at the Margin 8 Efficiency 8 Unintended Effects 10
Go to College? Exchange 11
7 Economic Categories 13
Economics in a Cosmetic Positive and Normative Economics 13 Microeconomics and Macroeconomics 14
Surgeon’s Office? A Reader Asks 16
12
Chapter Summary 16
OFFICE HOURS Key Terms and Concepts 17
“I Don’t Believe That Questions and Problems 17
Every Time a Person Does
Something, He Compares
the Marginal Benefits
and Costs”
15

APPENDIX A: WORKING WITH DIAGRAMS 19

Two-Variable Diagrams 19
Slope of a Line 20
Slope of a Line Is Constant 22
Slope of a Curve 22
The 45-Degree Line 22
Pie Charts 23
Bar Graphs 23
Line Graphs 24
Appendix Summary 26
Questions and Problems 26

APPENDIX B: SHOULD YOU MAJOR IN ECONOMICS? 27

Five Myths About Economics and an Economics Major 28
Myth 1: Economics Is All Mathematics and Statistics 28 Myth 2: Economics Is Only About
Inflation, Interest Rates, Unemployment, and Other Such Things 28 Myth 3: People Become

v
vi CONTENTS

Economists Only if They Want to “Make Money” 29 Myth 4: Economics Wasn’t Very
Interesting in High School, So It’s Not Going to Be Very Interesting in College 30 Myth 5:
Economics Is a Lot Like Business, But Business Is More Marketable 30
What Awaits You as an Economics Major? 30
What Do Economists Do? 31
Places to Find More Information 32
Concluding Remarks 32

CHAPTER  ECONOMIC ACTIVITIES: PRODUCING AND TRADING

The Production Possibilities Frontier 33
33

E C O N O M I C S 24/7 The Straight-Line PPF: Constant Opportunity Costs 33 The Bowed-Outward (Concave-
Downward) PPF: Increasing Opportunity Costs 34 Law of Increasing Opportunity Costs 36
The PPF and Your Grades
40
Economic Concepts Within a PPF Framework 37
Exchange or Trade 39
Trading Prisoners
41
Periods Relevant to Trade 39 Trade and the Terms of Trade 41 Costs of Trades 42
Trades and Third-Party Effects 44
Jerry Seinfeld, the
Doorman, and Production, Trade, and Specialization 44
Adam Smith Producing and Trading 44 Profit and a Lower Cost of Living 47 A Benevolent and All-
47 Knowing Dictator Versus the Invisible Hand 48
OFFICE HOURS A Reader Asks 50
“What Purpose Does the Chapter Summary 50
PPF Serve?” Key Terms and Concepts 51
49
Questions and Problems 51
Working with Numbers and Graphs 52

CHAPTER  SUPPLY AND DEMAND: THEORY

A Note About Theories 53
53

E C O N O M I C S 24/7 What Is Demand? 54

Ticket Prices at The Law of Demand 54 What Does Ceteris Paribus Mean? 55 Four Ways to Represent
Disney World the Law of Demand 56 Two Prices: Absolute and Relative 56 Why Does Quantity
58 Demanded Go Down as Price Goes Up? 57 Individual Demand Curve and Market Demand
iPods and the Law of
Curve 58 A Change in Quantity Demanded Versus a Change in Demand 59 What Factors
Demand Cause the Demand Curve to Shift? 62 Movement Factors and Shift Factors 65
62 Supply 66
Advertising and the The Law of Supply 66 Why Most Supply Curves Are Upward Sloping 67 Changes
Demand Curve in Supply Mean Shifts in Supply Curves 68 What Factors Cause the Supply Curve to
63 Shift? 69 A Change in Supply Versus a Change in Quantity Supplied 70
The Dowry and Marriage The Market: Putting Supply and Demand Together 71
Market Disequilibrium Supply and Demand at Work at an Auction 71 The Language of Supply and Demand: A
75 Few Important Terms 72 Moving to Equilibrium: What Happens to Price when There Is
Overbooking and the a Surplus or a Shortage? 72 Speed of Moving to Equilibrium 74 Moving to Equilibrium:
Airlines Maximum and Minimum Prices 75 Equilibrium in Terms of Consumers’ and Producers’
80 Surplus 76 What Can Change Equilibrium Price and Quantity? 78
OFFICE HOURS Demand and Supply as Equations 81
“I Thought Prices Equaled Price Controls 82
Costs Plus 10 Percent” Price Ceiling: Definition and Effects 82 Price Floor: Definition and Effects 85
86 A Reader Asks 87
Chapter Summary 87
Key Terms and Concepts 88
 CONTENTS vii
Questions and Problems 88
Working with Numbers and Graphs 90

CHAPTER  SUPPLY AND DEMAND: APPLICATIONS

Application 1: Why Is Medical Care So Expensive? 91
91

OFFICE HOURS Application 2: Where Will House Prices Change the Most? 94
“Doesn’t High Demand Application 3: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of
Mean High Quantity Admission? 95
Demanded?”
109
Application 4: Supply and Demand on a Freeway 96
Application 5: Price Ceilings in the Kidney Market 97
Application 6: The Minimum Wage Law 99
Application 7: Price Floors and Winners and Losers 101
Application 8: Are Renters Better Off? 102
Application 9: Do You Pay for Good Weather? 104
Application 10: College Superathletes 105
Application 11: 10 A.M. Classes in College 107
Application 12: What will Happen to the Price of Marijuana if the Purchase and Sale
of Marijuana Are Legalized? 108
A Reader Asks 110
Chapter Summary 110
Key Terms and Concepts 111
Questions and Problems 111
Working with Numbers and Graphs 112

Micr oe cono m ic s
Part  Microeconomic Fundamentals

CHAPTER  ELASTICITY 113

How to Approach the Study of Microeconomics 113
E C O N O M I C S 24/7 Consumers 114 Firms 114 Factor Owners 114 The Choices Made in Market
Settings 114 Recap 115
Drug Busts and Crime
121 Elasticity: Part 1 115
Why Is Jack Bauer Eating
Price Elasticity of Demand 115 Elasticity Is Not Slope 116 From Perfectly Elastic
a CalorieMate Block in to Perfectly Inelastic Demand 117 Price Elasticity of Demand and Total Revenue
Japan? (Total Expenditure) 119
126 Elasticity: Part 2 123
Will High Taxes on Price Elasticity of Demand Along a Straight-Line Demand Curve 123 Determinants of Price
Cigarettes Reduce Smoking? Elasticity of Demand 124
128 Other Elasticity Concepts 126
Greenhouse Gases and Gas- Cross Elasticity of Demand 127 Income Elasticity of Demand 127 Price Elasticity of
Efficient Cars Supply 130 Price Elasticity of Supply and Time 131
129
The Relationship Between Taxes and Elasticity 132
OFFICE HOURS Who Pays the Tax? 132 Elasticity and the Tax 133 Degree of Elasticity and Tax
“What Is the Relationship Revenue 134
Between Different Price
Elasticities of Demand and
Total Revenue?”
136
viii CONTENTS

A Reader Asks 137

Chapter Summary 137
Key Terms and Concepts 138
Questions and Problems 138
Working with Numbers and Graphs 139

CHAPTER  CONSUMER CHOICE: MAXIMIZING UTILITY AND

BEHAVIORAL ECONOMICS 140
Utility Theory 140
E C O N O M I C S 24/7 Utility: Total and Marginal 140 Law of Diminishing Marginal Utility 141 The Solution to
Who Would Spend
the Diamond-Water Paradox 144
$16,000 for a Peanut Consumer Equilibrium and Demand 145
Butter and Jelly Sandwich? Equating Marginal Utilities per Dollar 145 Maximizing Utility and the Law of
143 Demand 146 Should the Government Provide the Necessities of Life for Free? 148
How You Pay for Good Behavioral Economics 149
Weather Are People Willing to Reduce Others’ Incomes? 149 Is $1 Always $1? 150 Coffee
147 Mugs and the Endowment Effect 151 Does the Endowment Effect Hold Only for New
Which Is Better: A Tax Traders? 153
Rebate or a Tax Bonus?
A Reader Asks 155
150
Chapter Summary 156
To Accept or Reject the
Money Key Terms and Concepts 156
153 Questions and Problems 156
OFFICE HOURS Working with Numbers and Graphs 157
“Is There an Indirect
Way of Proving the Law
of Diminishing Marginal
Utility?”
154

APPENDIX C: BUDGET CONSTRAINT AND INDIFFERENCE CURVE ANALYSIS 158

The Budget Constraint 158
Slope of the Budget Constraint 158 What Will Change the Budget Constraint? 158
Indifference Curves 159
Constructing an Indifference Curve 159
Characteristics of Indifference Curves 160
The Indifference Map and the Budget Constraint Come Together 163
From Indifference Curves to a Demand Curve 163
Appendix Summary 164
Questions and Problems 165
 CONTENTS ix

CHAPTER  PRODUCTION AND COSTS

Why Firms Exist 166
166

E C O N O M I C S 24/7 The Market and the Firm: Invisible Hand Versus Visible Hand 166 The Alchian and Demsetz
Answer 167 Shirking in a Team 167 Ronald Coase on Why Firms Exist 168 Markets:
High School Students,
Staying Out Late, and Outside and Inside the Firm 169
More The Firm’s Objective: Maximizing Profit 169
177 Accounting Profit Versus Economic Profit 170 Zero Economic Profit Is Not as Bad as It
What Matters to Global Sounds 171
Competitiveness? Production 172
182 Production in the Short Run 172 Marginal Physical Product and Marginal
“I Have to Become an Cost 174 Average Productivity 177
Accountant” Costs of Production: Total, Average, Marginal 179
186
The AVC and ATC Curves in Relation to the MC Curve 180 Tying Short-Run Production to
OFFICE HOURS Costs 183 One More Cost Concept: Sunk Cost 184
“What Is the Difference Production and Costs in the Long Run 188
Between the Law of Long-Run Average Total Cost Curve 188 Economies of Scale, Diseconomies of Scale, and
Diminishing Marginal Constant Returns to Scale 189 Why Economies of Scale? 190 Why Diseconomies of
Returns and Diseconomies Scale? 190 Minimum Efficient Scale and Number of Firms in an Industry 190
of Scale?”
192 Shifts in Cost Curves 190
Taxes 191 Input Prices 191 Technology 191
A Reader Asks 193
Chapter Summary 193
Key Terms and Concepts 194
Questions and Problems 194
Working with Numbers and Graphs 195

Part  Product Markets and Policies

CHAPTER  PERFECT COMPETITION

The Theory of Perfect Competition
196
196
E C O N O M I C S 24/7 A Perfectly Competitive Firm Is a Price Taker 197 The Demand Curve for a Perfectly
Do Churches Compete? Competitive Firm Is Horizontal 197 The Marginal Revenue Curve of a Perfectly Competitive
199 Firm Is the Same as Its Demand Curve 200 Theory and Real-World Markets 201
Frank Sinatra, Sugar Perfect Competition in the Short Run 201
Ray Robinson, and the What Level of Output Does the Profit-Maximizing Firm Produce? 202 The Perfectly
Jamestown Settlement Competitive Firm and Resource Allocative Efficiency 203 To Produce or Not to
208 Produce: That Is the Question 203 The Perfectly Competitive Firm’s Short-Run Supply
Lost Salaries Curve 206 From Firm to Market (Industry) Supply Curve 207 Why Is the Market Supply
218 Curve Upward Sloping? 208
OFFICE HOURS Perfect Competition in the Long Run 209
The Conditions of Long-Run Competitive Equilibrium 209 The Perfectly Competitive Firm
“Do You Have to Know the and Productive Efficiency 211 Industry Adjustment to an Increase in Demand 211 Industry
MR ⫽ MC Condition to
Adjustment to a Decrease in Demand 215 Differences in Costs, Differences in Profits: Now
Be Successful in Business?”
219
You See It, Now You Don’t 215 Profit and Discrimination 216
Topics for Analysis Within the Theory of Perfect Competition 217
Do Higher Costs Mean Higher Prices? 217 Will the Perfectly Competitive Firm
Advertise? 217 Supplier-Set Price Versus Market-Determined Price: Collusion or
Competition? 218
A Reader Asks 220
x CONTENTS

Chapter Summary 220

Key Terms and Concepts 221
Questions and Problems 221
Working with Numbers and Graphs 222

CHAPTER  MONOPOLY 223

The Theory of Monopoly 223
E C O N O M I C S 24/7 Barriers to Entry: A Key to Understanding Monopoly 223 What Is the Difference Between a
Monopoly and the Boston
Government Monopoly and a Market Monopoly? 225
Tea Party Monopoly Pricing and Output Decisions 226
225 The Monopolist’s Demand and Marginal Revenue 226 The Monopolist’s Demand and
Amazon and Price Marginal Revenue Curves Are Not the Same 227 Price and Output for a Profit-Maximizing
Discrimination Monopolist 228 If a Firm Maximizes Revenue, Does It Automatically Maximize Profit Too? 228
237 Perfect Competition and Monopoly 230
Why Do District Attorneys Price, Marginal Revenue, and Marginal Cost 231 Monopoly, Perfect Competition, and
Plea-Bargain? Consumers’ Surplus 231 Monopoly or Nothing? 232
239
The Case Against Monopoly 233
If I Want ESPN, Why Am The Deadweight Loss of Monopoly 233 Rent Seeking 234 X-Inefficiency 236
I Buying MSNBC Too?
Price Discrimination 236
241
Types of Price Discrimination 236 Why a Monopolist Wants to Price Discriminate 236
OFFICE HOURS Conditions of Price Discrimination 237 Moving to P ⫽ MC Through Price
“Does the Single-Price Discrimination 238 You Can Have the Comics, Just Give Me the Coupons 238
Monopolist Lower Price Only A Reader Asks 243
on the Additional Unit?”
242
Chapter Summary 244
Key Terms and Concepts 244
Questions and Problems 244
Working with Numbers and Graphs 245

CHAPTER  MONOPOLISTIC COMPETITION, OLIGOPOLY, AND

GAME THEORY 246
The Theory of Monopolistic Competition 246
E C O N O M I C S 24/7 The Monopolistic Competitor’s Demand Curve 246 The Relationship Between Price and
The People Wear Prada Marginal Revenue for a Monopolistic Competitor 247 Output, Price, and Marginal Cost
250 for the Monopolistic Competitor 247 Will There Be Profits in the Long Run? 247 Excess
Capacity: What Is It, and Is It “Good” or “Bad”? 248 The Monopolistic Competitor and
How Is a New Year’s
Two Types of Efficiency 250
Resolution Like a Cartel
Agreement? Oligopoly: Assumptions and Real-World Behavior 250
254 The Concentration Ratio 251
Grade Inflation at College Price and Output Under Three Oligopoly Theories 251
266 The Cartel Theory 251 The Kinked Demand Curve Theory 255 The Price Leadership
OFFICE HOURS Theory 256
“Are Firms (as Sellers) Price Game Theory, Oligopoly, and Contestable Markets 258
Takers or Price Searchers?” Prisoner’s Dilemma 258 Oligopoly Firms’ Cartels and the Prisoner’s Dilemma 260 Are
268 Markets Contestable? 262
A Review of Market Structures 263
Applications of Game Theory 263
Grades and Partying 263 The Arms Race 265 Speed Limit Laws 266 The Fear of Guilt
as an Enforcement Mechanism 266
A Reader Asks 269
Chapter Summary 270
 CONTENTS xi

Key Terms and Concepts 270

Questions and Problems 271
Working with Numbers and Graphs 271

CHAPTER  GOVERNMENT AND PRODUCT MARKETS: ANTITRUST AND

REGULATION 272
Antitrust 272
E C O N O M I C S 24/7 Antitrust Acts 273 Unsettled Points in Antitrust Policy 275 Antitrust and
Thomas Edison and Mergers 277 Seven Antitrust Cases and Actions 277 Network Monopolies 280 Civil
Hollywood Action No. 98-1232 281
274 Regulation 284
High-Priced Ink Cartridges The Case of Natural Monopoly 284 Regulating the Natural Monopoly 285 Regulating
and Expensive Minibars Industries That Are Not Natural Monopolies 287 Theories of Regulation 288 The
281 Costs and Benefits of Regulation 288 Some Effects of Regulation Are
Macs, PCs, and People Unintended 289 Deregulation 290
Who Are Different A Reader Asks 292
283
Chapter Summary 292
Why Am I Always Flying
Key Terms and Concepts 293
to Dallas?
287 Questions and Problems 293
OFFICE HOURS Working with Numbers and Graphs 294
“What Is the Advantage of
the Herfindahl Index?”
291

Part  Factor Markets and Related Issues

CHAPTER  FACTOR MARKETS: WITH EMPHASIS ON THE LABOR

MARKET 295
Factor Markets 295
E C O N O M I C S 24/7 The Demand for a Factor 295 Marginal Revenue Product: Two Ways to Calculate
Why Jobs Don’t Always
It 296 The MRP Curve Is the Firm’s Factor Demand Curve 297 Value Marginal
Move to the Low-Wage Product 298 An Important Question: Is MRP ⫽ VMP ? 298 Marginal Factor Cost:
Country The Firm’s Factor Supply Curve 299 How Many Units of a Factor Should a Firm
304 Buy? 300 When There Is More Than One Factor, How Much of Each Factor Should the
How Crime, Outsourcing,
Firm Buy? 301
and Multitasking Might Be The Labor Market 302
Related Shifts in a Firm’s MRP, or Factor Demand, Curve 302 Market Demand for Labor 304 The
307 Elasticity of Demand for Labor 305 Market Supply of Labor 306 An Individual’s
The Wage Rate for a Street- Supply of Labor 307 Shifts in the Labor Supply Curve 308 Putting Supply and Demand
Level Pusher in a Drug Together 309 Why Do Wage Rates Differ? 309 Why Demand and Supply Differ Among
Gang Labor Markets 310 Why Did You Choose Your Major? 311 Marginal Productivity
312 Theory 312
It’s a Party Every Night Labor Markets and Information 314
313 Screening Potential Employees 314 Promoting from Within 315 Discrimination or an
OFFICE HOURS Information Problem? 315
“Why Do Economists A Reader Asks 317
Think in Twos?” Chapter Summary 317
316
xii CONTENTS
Key Terms and Concepts 318
Questions and Problems 318
Working with Numbers and Graphs 319

CHAPTER  WAGES, UNIONS, AND LABOR

The Facts and Figures of Labor Unions
320
320
E C O N O M I C S 24/7 Types of Unions 320 Union Membership: The United States and Abroad 321
Technology, the Price of Objectives of Labor Unions 321
Competing Factors, and Employment for All Members 321 Maximizing the Total Wage Bill 322 Maximizing
Displaced Workers Income for a Limited Number of Union Members 322 Wage-Employment Trade-Off 322
327
Practices of Labor Unions 323
College Professors’ Affecting Elasticity of Demand for Union Labor 323 Affecting the Demand for Union
Objectives Labor 324 Affecting the Supply of Union Labor 325 Affecting Wages Directly: Collective
328
Bargaining 325 Strikes 326
Are You Ready for Some Effects of Labor Unions 327
Football?
The Case of Monopsony 327 Unions’ Effects on Wages 330 Unions’ Effects on
333
Prices 332 Unions’ Effects on Productivity and Efficiency: Two Views 333
OFFICE HOURS A Reader Asks 336
“Don’t Higher Wages Chapter Summary 336
Reduce Profits?”
335 Key Terms and Concepts 337
Questions and Problems 337
Working with Numbers and Graphs 338

CHAPTER  THE DISTRIBUTION OF INCOME AND POVERTY

Some Facts About Income Distribution 339
339

E C O N O M I C S 24/7 Who Are the Rich and How Rich Are They? 339 The Effect of Age on the Income
Statistics Can Mislead if Distribution 341 A Simple Equation 342
You Don’t Know How Measuring Income Equality 344
They Are Made The Lorenz Curve 344 The Gini Coefficient 345 A Limitation of the Gini Coefficient 346
343
Why Income Inequality Exists 347
Winner-Take-All Markets Factors Contributing to Income Inequality 347 Income Differences: Some Are Voluntary,
350 Some Are Not 349
Q&A: Poverty and Income Normative Standards of Income Distribution 350
356
The Marginal Productivity Normative Standard 350 The Absolute Income Equality
OFFICE HOURS Normative Standard 353 The Rawlsian Normative Standard 353
“Are the Number of Persons Poverty 354
in Each Fifth the Same?” What Is Poverty? 354 Limitations of the Official Poverty Income Statistics 355 Who Are
358 the Poor? 355 What Is the Justification for Government Redistributing Income? 356
A Reader Asks 359
Chapter Summary 359
Key Terms and Concepts 360
Questions and Problems 360
Working with Numbers and Graphs 360
 CONTENTS xiii

CHAPTER  INTEREST, RENT, AND PROFIT

Interest 361
361

E C O N O M I C S 24/7 Loanable Funds: Demand and Supply 361 The Price for Loanable Funds and the Return
on Capital Goods Tend to Equality 364 Why Do Interest Rates Differ? 364 Nominal
Is the Car Worth Buying?
367
and Real Interest Rates 365 Present Value: What Is Something Tomorrow Worth
Today? 366 Deciding Whether or Not to Purchase a Capital Good 367
Loans for the Poorest of the
Poor Rent 369
368 David Ricardo, the Price of Grain, and Land Rent 369 The Supply Curve of Land Can Be
Upward Sloping 370 Economic Rent and Other Factors of Production 370 Economic
Insuring Oneself Against
Terrorism Rent and Baseball Players: The Perspective from Which the Factor Is Viewed
374 Matters 371 Competing for Artificial and Real Rents 371 Do People Overestimate Their
Worth to Others, or Are They Simply Seeking Economic Rent? 371
OFFICE HOURS
Profit 372
“How Is Present Value Theories of Profit 372 What Is Entrepreneurship? 374 What a Microwave Oven and an
Used in the Courtroom?” Errand Runner Have in Common 374 Profit and Loss as Signals 375
376
A Reader Asks 377
Chapter Summary 377
Key Terms and Concepts 378
Questions and Problems 378
Working with Numbers and Graphs 379

Part  Market Failure and Public Choice

CHAPTER  MARKET FAILURE: EXTERNALITIES, PUBLIC GOODS, AND

ASYMMETRIC INFORMATION 380
Externalities 380
E C O N O M I C S 24/7 Costs and Benefits of Activities 381 Marginal Costs and Benefits of Activities 381 Social
Switching Costs and Optimality, or Efficiency, Conditions 382 Three Categories of Activities 382 Externalities
Market Failure (Maybe) in Consumption and in Production 383 Diagram of a Negative Externality 384 Diagram of
383 a Positive Externality 385
Want to Lease a Rainforest Internalizing Externalities 387
for $1.6 Million per Year? Persuasion 387 Taxes and Subsidies 388 Assigning Property Rights 388 Voluntary
387 Agreements 389 Combining Property Rights Assignments and Voluntary
Telemarketers, Where Are Agreements 389 Beyond Internalizing: Setting Regulations 390
You? Dealing with a Negative Externality in the Environment 391
391 Is No Pollution Worse Than Some Pollution? 392 Two Methods to Reduce Air
The Right Amount of Pollution 392
National Defense Public Goods: Excludable and Nonexcludable Goods 394
396
Goods 394 The Free Rider 395 Nonexcludable Versus Nonrivalrous 395
Arriving Late to Class, Asymmetric Information 397
Grading on a Curve, and
Asymmetric Information in a Product Market 397 Asymmetric Information in a Factor
Studying Together for the
Midterm Market 398 Is There Market Failure? 398 Adverse Selection 399 Moral Hazard 400
400 A Reader Asks 403
OFFICE HOURS Chapter Summary 403
“It Seems Wrong to Let Key Terms and Concepts 404
Some Business Firms Pay to
Pollute”
402
xiv CONTENTS

Questions and Problems 404

Working with Numbers and Graphs 405

CHAPTER  PUBLIC CHOICE: ECONOMIC THEORY APPLIED TO

POLITICS 406
Public Choice Theory 406
E C O N O M I C S 24/7 The Political Market 407
A Simple Majority Voting Moving Toward the Middle: The Median Voter Model 407 What Does the Theory
Rule: The Case of the Predict? 408
Statue in the Public Square Voters and Rational Ignorance 410
409 The Costs and Benefits of Voting 411 Rational Ignorance 412
Are You Rationally More About Voting 414
Ignorant? Example 1: Voting for a Nonexcludable Public Good 414 Example 2: Voting and
412
Efficiency 415
Economic Illiteracy and
Special Interest Groups 416
Democracy
413
Information and Lobbying Efforts 416 Congressional Districts as Special Interest
Groups 417 Public Interest Talk, Special Interest Legislation 417 Special Interest Groups
Inheritance, Heirs, and and Rent Seeking 418
Why the Firstborn Became
King or Queen Government Bureaucracy 420
420 A View of Government 422
OFFICE HOURS A Reader Asks 424
“Doesn’t Public Choice Chapter Summary 424
Paint a Bleak Picture of Key Terms and Concepts 425
Politics and Government?”
423 Questions and Problems 425
Working with Numbers and Graphs 426

The Glob al Eco nom y

Part  International Economics and Globalization

CHAPTER  INTERNATIONAL TRADE

International Trade Theory 427
427

E C O N O M I C S 24/7 How Countries Know What to Trade 428 How Countries Know when They Have a
Dividing the Work Comparative Advantage 430
431 Trade Restrictions 432
You’re Getting Better The Distributional Effects of International Trade 432 Consumers’ and Producers’
Because Others Are Getting Surpluses 432 The Benefits and Costs of Trade Restrictions 435 Why Nations Sometimes
Better Restrict Trade 438
433
World Trade Organization (WTO) 441
Offshore Outsourcing, or A Reader Asks 443
Offshoring
439 Chapter Summary 443

OFFICE HOURS Key Terms and Concepts 444

“Should We Impose Tariffs Questions and Problems 444

if They Impose Tariffs?” Working with Numbers and Graphs 445
442
 Another Random Document on
Scribd Without Any Related Topics
 APPENDIX

THE LOVELY NORTHERNE LASSE

a. Roxburghe Ballads, I, 190, in the Ballad Society’s reprint, ed. W.

Chappell, I, 587. b. Rawlinson Ballads, 566, fol. 205.
a WAS printed at London for F. Coules, who,
according to Mr Chappell, flourished during the last
five years of James First’s reign and throughout that
of Charles First: dated by Mr Bullen, 1640. b was
printed for F. Coles, T. Vere, and J. Wright, 1655–80
(Chappell). There is another copy in the Euing
collection, No 166, printed for Francis Coles in the
Old Bayly, who may be the same person as the
printer of a; and a fourth in the Douce collection, II,
137, verso, without printer’s name. A copy differing
from a by only three words is given by R. H. Evans,
Old Ballads, 1810, I, 88.
Burton, in the fifth edition of his Anatomy of
Melancholy, Oxford, 1638, p. 536, says: “The very
rusticks and hog-rubbers ... have their ballads,
country tunes, O the broome, the bonny, bonny
broome,” etc. (Chappell). This remark is not found in
the fourth edition, Oxford, 1632, p. 544. Concerning
the air, see Chappell’s Popular Music, pp. 458–61,
613, 783.

The Lovely Northerne Lasse.

Who in this ditty, here complaining, shewes
What harme she got, milking her dadyes ewes.

To a pleasant Scotch tune, called The broom of

Cowden Knowes.
1
Through Liddersdale as lately I went,
I musing on did passe;
I heard a maid was discontent,
she sighd, and said, Alas!
All maids that ever deceived was
beare a part of these my woes,
For once I was a bonny lasse,
when I milkt my dadyes ewes.
With, O the broome, the bonny broome,
the broome of Cowdon Knowes!
Faine would I be in the North Countrey,
to milke my dadyes ewes.

2
‘My love into the fields did come,
when my dady was at home;
Sugred words he gave me there,
praisd me for such a one.
His honey breath and lips so soft,
and his alluring eye
And tempting tong, hath woo’d me oft,
now forces me to cry,
All maids, &c.

3
‘He joyed me with his pretty chat,
so well discourse could he,
Talking of this thing and of that,
which greatly likëd me.
I was so greatly taken with his speech,
and with his comely making;
He usëd all the meanes could be
to inchant me with his speaking.

4
‘In Danby Forest I was borne;
 In Danby Forest I was borne;
my beauty did excell;
My parents dearely lovëd me
till my belly began to swell.
I might have beene a prince’s peere
when I came over the knoes,
Till the shepherds boy beguilëd me,
milking my dadyes ewes.

5
‘When once I felt my belly swell,
no longer might I abide;
My mother put me out of doores,
and bangd me backe and side.
Then did I range the world so wide,
wandering about the knoes,
Cursing the boy that helpëd me
to fold my dadyes ewes.

6
‘Who would have thought a boy so young
would have usd a maiden so
As to allure her with his tongue,
and then from her to goe?
Which hath also procured my woe,
to credit his faire shewes,
Which now too late repent I doe,
the milking of the ewes.

7
‘I often since have wisht that I
had never seen his face;
I needed not thus mournefully
have sighed, and said Alas!
I might have matchëd with the best,
as all the country knowes,
Had I escaped the shepherds boy
 helpt me to fold my ewes.

8
‘All maidens faire, then have a care
when you a milking goe;
Trust not to young men’s tempting tongues,
that will deceive you so.
Them you shall finde to be unkinde
and glory in your woes;
For the shepheards boy beguilëd mee
folding my dadyes ewes.’

9
‘If you your virgin honours keepe,
esteeming of them deare,
You need not then to waile and weepe,
or your parents anger feare.
As I have said, of them beware
would glory in your woes;
You then may sing with merry cheere,
milking your dadyes ewes.’

10
A young man, hearing her complaint,
did pity this her case,
Saying to her, Sweet beautious saint,
I grieve so faire a face
Should sorrow so; then, sweeting, know,
to ease thee of thy woes,
Ile goe with thee to the North Country,
to milke thy dadyes ewes.

11
‘Leander like, I will remaine
still constant to thee ever,
As Piramus, or Troyalus,
till death our lives shall sever
 till death our lives shall sever.
Let me be hated evermore,
of all men that me knowes,
If false to thee, sweet heart, I bee,
milking thy dadyes ewes.’

12
Then modestly she did reply,
‘Might I so happy bee
Of you to finde a husband kinde,
and for to marrie me,
Then to you I would during life
continue constant still,
And be a true, obedient wife,
observing of your will.
With, O the broome, the bonny broome,
the broome of Cowden Knoes!
Faine would I be in the North Country,
milking my dadyes ewes.

13
Thus, with a gentle soft imbrace,
he tooke her in his armes,
And with a kisse he smiling said,
‘Ile shield thee from all harmes,
And instantly will marry thee,
to ease thee of thy woes,
And goe with thee to the North Country,
to milke thy dadyes ewes.’
With, O the broome, the bonny broome,
the broome of Cowden Knoes!
Faine would I be in the North Country,
to milke my dadyes ewes.

a.
 After 7: The Second Part.
b.
Title: in the ditty.
1
2 . field.
2
2 . from home.
5 . amongst for about.
6

3
6 . So to.
6
6 . hath alas.
7. Wanting.
5
8 . Then.
1
9 . virgins.
5
10 . I know.
13 . my for thy.
3

9
13 . With O the broom, &c.
 218

THE FALSE LOVER WON BACK

A. ‘The Fause Lover,’ Buchan’s MSS, I, 114;

Buchan’s Ballads of the North of Scotland, I, 268.
B. ‘The place where my love Johnny dwells,’
Christie’s Traditional Ballad Airs, I, 144.

A young man is deserting one maid for another.

The object of his new fancy lives at a distance, and
he is on his way to her. He is followed by his old love
from stage to stage; he repelling her, and she
tenderly remonstrating. His heart gradually softens;
he buys her gifts from town to town, and though
each time he bids her go back, he ends with buying
her a wedding gown (ring) and marrying her.
Two pretty stanzas in A, 4, 5, seem not to belong
to this story. The inconstant youth would have been
only too glad to have the faithful maid look to other
men, and gives her all liberty to do so. These two
stanzas are first found in Herd’s MSS, I, 53, and in
Herd’s Ancient and Modern Scottish Songs, 1776, II,
6, as follows:
False luve, and hae ye played me this,
In the simmer, mid the flowers?
I sall repay ye back agen,
In the winter, mid the showers.

Bot again, dear luve, and again, dear luve,

Will ye not turn again?
As ye look to ither women,
Sall I to ither men.

In a manuscript at Abbotsford, entitled Scottish

Songs, 1795 (containing pieces dated up to 1806),
fol. 69, they stand thus:
False luve, and hae ye played me this,
In simmer amang the flowers?
I shall repay you back agen
In winter amang the showers.

Unless again, again, dear luve,

But if ye turn agen,
As ye look other women to,
Sall I to other men.

Scott has put these verses, a little varied, into

Davie Gellatley’s mouth, in the ninth chapter of
‘Waverley.’ The first, with a change, occurs also in
‘The Gardener,’ No 219, A 7, B 15, C 3.

A is translated by Rosa Warrens, Schottische

Volkslieder, p. 141, No 32; by Gerhard, p. 114.
 A
Buchan’s MSS, I, 114.
1
A Fair maid sat in her bower-door,
Wringing her lily hands,
And by it came a sprightly youth,
Fast tripping oer the strands.

2
‘Where gang ye, young John,’ she says,
‘Sae early in the day?
It gars me think, by your fast trip,
Your journey’s far away.’

3
He turnd about wi surly look,
And said, What’s that to thee?
I’m gaen to see a lovely maid,
Mair fairer far than ye.

4
‘Now hae ye playd me this, fause love,
In simmer, mid the flowers?
I shall repay ye back again,
In winter, mid the showers.

5
‘But again, dear love, and again, dear love,
Will ye not turn again?
For as ye look to other women,
I shall to other men.’

6
‘Make your choice of whom you please,
For I my choice will have;
I’ve chosen a maid more fair than thee,
I never will deceive.’

7
But she’s kilt up her claithing fine,
And after him gaed she;
But aye he said, Ye’ll turn again,
Nae farder gae wi me.

8
‘But again, dear love, and again, dear love,
Will ye never love me again?
Alas for loving you sae well,
And you nae me again!’

9
The first an town that they came till,
He bought her brooch and ring;
And aye he bade her turn again,
And gang nae farder wi him.

10
‘But again, dear love, and again, dear love,
Will ye never love me again?
Alas for loving you sae well,
And you nae me again!’

11
The next an town that they came till,
He bought her muff and gloves;
But aye he bade her turn again,
And choose some other loves.

12
‘But again, dear love, and again, dear love,
Will ye never love me again?
Alas for loving you sae well,
And you nae me again!’

13
The next an town that they came till,
 His heart it grew mair fain,
And he was as deep in love wi her
As she was ower again.

14
The next an town that they came till,
He bought her wedding gown,
And made her lady of ha’s and bowers,
Into sweet Berwick town.
 B
Christie’s Traditional Ballad Airs, I, 144; from the recitation of a
woman born in Buchan.
1
The sun shines high on yonder hill,
And low on yonder town;
In the place where my love Johnny dwells,
The sun gaes never down.

2
‘O when will ye be back, bonny lad,
O when will ye be hame?’
‘When heather-hills are nine times brunt,
And a’ grown green again.’

3
‘O that’s ower lang awa, bonny lad,
O that’s ower lang frae hame;
For I’ll be dead and in my grave
Ere ye come back again.’

4
He put his foot into the stirrup
And said he maun go ride,
But she kilted up her green claithing
And said she woudna bide.

5
The firsten town that they came to,
He bought her hose and sheen,
And bade her rue and return again,
And gang nae farther wi him.

6
‘Ye likena me at a’, bonny lad,
Ye likena me at a’;’
‘It’s sair for you likes me sae weel
And me nae you at a’.’

7
The nexten town that they came to,
He bought her a braw new gown,
And bade her rue and return again,
And gang nae farther wi him.

8
The nexten town that they came to,
He bought her a wedding ring,
And bade her dry her rosy cheeks,
And he would tak her wi him.

9
‘O wae be to your bonny face,
And your twa blinkin een!
And wae be to your rosy cheeks!
They’ve stown this heart o mine.

10
‘There’s comfort for the comfortless,
There’s honey for the bee;
There’s comfort for the comfortless,
There’s nane but you for me.’

A.
1
9 . first and: come.
1 1
11 , 13 . next and.
Variations in Buchan’s Ballads of the North of
Scotland, I, 268.
4
5 . Shall I.
1
6 . your choose.
 3
7 . turn back.
4
7 . gang.
11, 12. Omitted.
13 . as wanting.
3

4
14 . In bonny Berwick.
 219

THE GARDENER

A. Kinloch MSS, V, 47. ‘The Gardener,’ Kinloch MSS,

VII, 19; Kinloch’s Ancient Scottish Ballads, p. 74.
B. ‘The Gardener Lad,’ Buchan’s Ballads of the
North of Scotland, II, 187.
C. Fragment communicated by Dr Thomas
Davidson.

A gardener will apparel a maid from head to foot

with flowers, if she will be his bride. He gets a wintry
answer: the snow shall be his shirt, the wind his hat,
the rain his coat.
B 1–6 is mere jargon, foisted into this pretty ballad
as a preface.
A 7, B 15, C 3, is found, substantially, in the
preceding ballad, and perhaps belonged originally to
neither.

Freely translated from A and B by Rosa Warrens,

Schottische Volkslieder, p. 134, No 30.
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