Microeconomics Principles and Policy

by Baumol, William J.

• ISBN13: 9780030268472
• ISBN10: 0030268478
• Edition: 8th
• Format: Paperback
• Copyright: 1999-08-02
• Publisher: South-Western College Pub

Summary

Since introducing the aggregate supply/aggregate demand model as a fundamental tool for learning economics in the first edition of their textbook, William Baumol and Alan Blinder have, for over two decades, led the teaching and learning of economics with their authoritative and timely discussion of the field. Now in its eighth edition, Microeconomics: Principles and Policy remains a time-tested tool in teaching and learning the ever-evolving field of economics.

Table of Contents

About the Authors	ix
Preface	xi
PART I Getting Acquainted with Economics	1	(90)
What is Economics?	3	(14)
Ideas for beyond the Final Exam	4	(5)
How Much Does It Really Cost?	4	(1)
Attempts to Repeal the Laws of Supply and Demand-The Market Strikes Back	4	(1)
The Surprising Principle of Comparative Advantage	5	(1)
Trade Is a Win-Win Situation	5	(1)
The Importance of Thinking at the Margin	6	(1)
Externalities: A Shortcoming of the Market Cured by Market Methods	6	(1)
Why the Costs of Education and Medical Care Keep Growing	6	(1)
The Trade-off between Efficiency and Equality	7	(1)
The Short-Run Trade-off between Inflation and Unemployment	8	(1)
Inflation Distorts Measurements	8	(1)
Why Was It Important to Reduce the Budget Deficit?	8	(1)
Productivity Growth Is (Almost) Everything in the Long Run	9	(1)
Epilogue	9	(1)
Inside the Economist's Tool Kit	9	(6)
Economics as a Discipline	9	(1)
The Need for Abstraction	10	(2)
The Role of Economic Theory	12	(1)
What is an Economic Model?	13	(1)
Reasons for Disagreements: Imperfect Information and Value Judgments	14	(1)
Common Sense: Useful but Dangerous	15	(1)
Summary	15	(1)
Key Terms	16	(1)
Questions for Review	16	(1)
The Use and Misuse of Graphs	17	(14)
Graphs Used in Economic Analysis	18	(1)
What's Wrong with This Graph?	18	(5)
Two-Variable Diagrams	18	(2)
The Definition and Measurement of Slope	20	(2)
Rays through the Origin and 45° Lines	22	(1)
Squeezing Three Dimensions into Two: Contour Maps	22	(1)
Perils in the Interpretation of Graphs	23	(4)
The Interpretation of Growth Trends	24	(1)
Distorting Trends by Choice of the Time Period	25	(2)
Dangers of Omitting the Origin: The Puzzle Solved	27	(3)
Unreliability of Steepness and Choice of Units	28	(2)
Summary	30	(1)
Key Terms	30	(1)
Questions for Review	30	(1)
The Economy: Myth and Reality	31	(20)
The American Economy: A Thumbnail Sketch	32	(5)
A Private Enterprise Economy	32	(2)
A Relatively ``Closed'' Economy	34	(1)
A Growing Economy ... but with Inflation	34	(2)
Bumps along the Growth Path: Recessions	36	(1)
The Inputs: Labor and Capital	37	(4)
The American Workforce: Who is in It?	38	(1)
The American Workforce: What It Does	38	(2)
The American Workforce: What It Earns	40	(1)
Capital and Its Earnings	41	(1)
The Outputs: What Does America Produce?	41	(1)
The Central Role of Business Firms	42	(1)
Measuring Economic Progress	43	(2)
What's Missing From the Picture? Government	45	(4)
The Government as Referee	46	(1)
The Government as Business Regulator	46	(1)
Government Expenditures	46	(1)
Taxes in America	47	(1)
The Government as Redistributor	48	(1)
Conclusion: The Mixed Economy	49	(1)
Summary	49	(1)
Key Terms	50	(1)
Questions for Review	50	(1)
Scarcity and Choice: The Economic Problem	51	(16)
What to do With the Budget Surplus?	52	(1)
Scarcity, Choice, and Opportunity Cost	52	(2)
Opportunity Cost and Money Cost	53	(1)
Scarcity and Choice for a Single Firm	54	(2)
The Production Possibilities Frontier	54	(1)
The Principle of Increasing Costs	55	(1)
Scarcity and Choice for the Entire Society	56	(1)
Scarcity and Choice Elsewhere in the Economy	56	(1)
Allocating the Budget Surplus	57	(2)
Application: Economic Growth in the United States and the Asian ``Tigers''	57	(2)
The Concept of Efficiency	59	(1)
The Three Coordination Tasks of any Economy	60	(1)
Specialization Fosters Efficient Resource Allocation	60	(2)
The Wonders of the Division of Labor	60	(1)
The Amazing Principle of Comparative Advantage	61	(1)
Specialization Leads to Exchange	62	(1)
Markets, Prices, and the Three Coordination Tasks	63	(1)
Last Word: Don't Confuse Ends with Means	64	(1)
Summary	64	(1)
Key Terms	65	(1)
Questions for Review	65	(2)
Supply and Demand: An Initial Look	67	(24)
What in the World Happened to Those Asian Currencies?	68	(1)
The Invisible Hand	68	(2)
Demand and Quantity Demanded	70	(3)
The Demand Schedule	70	(1)
The Demand Curve	71	(1)
Shifts of the Demand Curve	71	(2)
Supply and Quantity Supplied	73	(4)
The Supply Schedule and the Supply Curve	73	(2)
Shifts of the Supply Curve	75	(2)
Supply and Demand Equilibrium	77	(3)
The Law of Supply and Demand	79	(1)
Effects of Demand Shifts on Supply-Demand Equilibrium	79	(1)
Application: The Fall of the Rupiah	80	(2)
Supply Shifts and Supply-Demand Equilibrium	80	(1)
Application: Who Really Pays That Tax?	81	(1)
Fighting the Invisible Hand: The Market Fights Back	82	(5)
Restraining the Market Mechanism: Price Ceilings	83	(1)
Case Study: Rent Controls in New York City	83	(2)
Restraining the Market Mechanism: Price Floors	85	(1)
Case Study: Sugar Price Supports	85	(1)
A Can of Worms	86	(1)
A Simple But Powerful Lesson	87	(1)
Summary	87	(1)
Key Terms	88	(1)
Questions for Review	88	(3)
PART II The Building Blocks of Demand and Supply	91	(98)
Consumer Choice: Individual and Market Demand	93	(24)
Paradox: Should Water be Worth More Than Diamonds?	94	(1)
Scarcity and Demand	94	(1)
Utility: A Tool to Analyze Purchase Decisions	95	(7)
Total versus Marginal Utility	96	(1)
The ``Law'' of Diminishing Marginal Utility	96	(3)
Using Marginal Utility: The Optimal Purchase Rule	99	(2)
From Diminishing Marginal Utility to Downward-Sloping Demand Curves	101	(1)
Consumer Choice as a Trade-Off: Opportunity Cost	102	(2)
Consumer's Surplus: The Net Gain From a Purchase	102	(2)
Resolving the Diamond-Water Paradox	104	(1)
Income and Quantity Demanded	105	(1)
From Individual Demand Curves to Market Demand Curves	105	(2)
Market Demand as a Horizontal Sum	105	(1)
The ``Law'' of Demand	105	(2)
Exceptions to the Law of Demand	107	(1)
Summary	107	(1)
Key Terms	108	(1)
Questions for Review	108	(1)
Appendix: Analyzing Consumer Choice Graphically: Indifference Curve Analysis	108	(1)
Geometry of Available Choices: The Budget Line	109	(2)
Properties of the Budget Line	109	(1)
Changes in the Budget Line	110	(1)
What the Consumer Prefers: Properties of the Indifference Curve	111	(1)
The Slopes of Indifference Curves and Budget Lines	112	(3)
Tangency Conditions	113	(1)
Consequences of Income Changes: Inferior Goods	114	(1)
Consequences of Price Changes: Deriving the Demand Curve	114	(1)
Summary	115	(1)
Key Terms	115	(1)
Questions for Review	116	(1)
Demand and Elasticity	117	(20)
Will Taxing Cigarettes Make Teenagers Stop Smoking?	118	(1)
Elasticity: The Measure of Responsiveness	119	(5)
Price Elasticity of Demand and the Shapes of Demand Curves	121	(3)
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure	124	(1)
So, Will A Cigarette Tax Decrease Teenage Smoking Significantly?	125	(1)
What Determines Demand Elasticity?	126	(1)
Elasticity as a General Concept	127	(2)
Income Elasticity	127	(1)
Price Elasticity of Supply	127	(1)
Cross Elasticity of Demand	127	(2)
Changes in Demand: Movement Along the Demand Curve Versus Shifts in the Demand Curve	129	(2)
Demand Shifters	129	(2)
The Time Period of the Demand Curve and Economic Decision Making	131	(1)
Real-World Application: Polaroid Versus Kodak	132	(1)
Summary	133	(1)
Key Terms	133	(1)
Questions for Review	133	(1)
Appendix: Statistical Analysis of Demand Relationships	134	(1)
An Illustration: Did the Advertising Program Work?	135	(2)
Production, Inputs, and Cost: Building Blocks for Supply Analysis	137	(30)
Are Larger Firms More Efficient?	138	(1)
Short-Run Versus Long-Run Costs: What Makes an Input Variable?	139	(2)
The Economic Short Run versus the Economic Long Run	140	(1)
Fixed Costs and Variable Costs	140	(1)
Production, Input Choice, and Cost With One Variable Input	141	(9)
Total, Average, and Marginal Physical Products	141	(1)
Marginal Physical Product and the ``Law'' of Diminishing Marginal Returns	142	(2)
The Optimal Quantity of an Input and Diminishing Returns	144	(1)
Input Quantities and Total, Average, and Marginal Cost Curves	145	(3)
The Law of Diminishing Marginal Productivity and the U-Shaped Average Cost Curve	148	(1)
The Average Cost Curve in the Short and Long Run	149	(1)
Multiple Input Decisions: The Choice of Optimal Input Combinations	150	(5)
Substitutability: The Choice of Input Proportions	150	(1)
The Production Function and Substitutability	151	(2)
The Marginal Rule for Optimal Input Proportions	153	(1)
Changes in Input Prices and Optimal Input Proportions	154	(1)
Economies of Scale	155	(4)
The ''Law`` of Diminishing Returns and Returns to Scale	157	(1)
Historical Costs versus Analytical Cost Curves	158	(1)
Resolving the Economies of Scale Issue	159	(2)
Cost Minimization in Theory and Practice	160	(1)
Summary	161	(1)
Key Terms	161	(1)
Questions for Review	161	(1)
Appendix: Production Indifference Curves	162	(1)
Characteristics of the Production Indifference Curves, or Isoquants	163	(1)
The Choice of Input Combinations	163	(1)
Cost Minimization, Expansion Path, and Cost Curves	164	(1)
Effects of Changes in Input Prices	164	(1)
Summary	164	(1)
Key Terms	165	(1)
Questions for Review	165	(2)
Output, Price, and Profit: The Importance of Marginal Analysis	167	(22)
Two Puzzles	168	(1)
Price and Quantity: One Decision, Not Two	169	(1)
Total Profit: Keep Your Eye on the Goal	170	(4)
Total, Average, and Marginal Revenue	170	(2)
Total, Average, and Marginal Cost	172	(1)
Maximization of Total Profit	172	(2)
Profit Maximization: A Graphical Interpretation	174	(1)
Marginal Analysis and Maximization of Total Profit	174	(5)
Marginal Revenue and Marginal Cost: Guides to Optimization	176	(1)
Finding the Optimal Price from Optimal Output	177	(2)
Generalization: The Logic of Marginal Analysis and Maximization	179	(2)
Application: Fixed Cost and the Profit-Maximizing Price	180	(1)
Marginal Analysis in Real Decision Problems	181	(2)
Conclusion: The Fundamental Role of Marginal Analysis	183	(1)
The Theory and Reality: A Word of Caution	183	(2)
Summary	185	(1)
Key Terms	185	(1)
Questions for Review	185	(1)
Appendix: The Relationships Among Total, Average, and Marginal Data	186	(1)
Graphical Representation of Marginal and Average Curves	187	(1)
Questions for Review	187	(2)
PART III Markets, from Competition to Monopoly: Virtues and Vices	189	(138)
The Firm and the Industry Under Perfect Competition	191	(18)
Pollution Reduction Incentives That Actually Increase Pollution	192	(1)
Perfect Competition Defined	192	(1)
The Competitive Firm	193	(5)
The Firm's Demand Curve under Perfect Competition	193	(1)
Short-Run Equilibrium for the Perfectly Competitive Firm	194	(2)
Short-Run Profit: Graphic Representation	196	(1)
The Case of Short-Term Losses	196	(1)
Shutdown and Break-Even Analysis	196	(2)
The Competitive Firm's Short-Run Supply Curve	198	(1)
The Competitive Industry	198	(6)
The Competitive Industry's Short-Run Supply Curve	198	(2)
Industry Equilibrium in the Short Run	200	(1)
Industry and Firm Equilibrium in the Long Run	200	(3)
Zero Economic Profit: The Opportunity Cost of Capital	203	(1)
The Long Run Industry Supply Curve	203	(1)
Perfect Competition and Economic Efficiency	204	(2)
Which is Better to Cut Pollution-The Carrot or the Stick?	206	(1)
Summary	207	(1)
Key Terms	208	(1)
Questions for Review	208	(1)
The Price System and the Case for Free Markets	209	(20)
How Should Caltrans Set the Price to Cross the San Francisco-Oakland Bay Bridge?	210	(1)
Efficient Resource Allocation and Pricing	210	(3)
Pricing to Promote Efficiency: An Example	211	(1)
Can Price Increases Ever Serve the Public Interest?	212	(1)
Scarcity and the Need to Coordinate Economic Decisions	213	(8)
Three Coordination Tasks in the Economy	214	(3)
Input-Output Analysis: The Near Impossibility of Perfect Central Planning	217	(2)
Which Buyers and Which Sellers Get Priority?	219	(2)
How Perfect Competition Achieves Efficiency	221	(5)
Example: Efficient Resource Allocation in Output Selection	221	(2)
The Invisible Hand at Work	223	(1)
Other Roles of Prices: Income Distribution and Fairness	223	(1)
Yet Another Free-Market Achievement: Growth versus Efficiency	224	(2)
San Francisco Bridge Pricing Revisited	226	(1)
Toward Assessment of the Price Mechanism	227	(1)
Summary	227	(1)
Key Terms	228	(1)
Questions for Review	228	(1)
Monopoly	229	(16)
Competition in Local Telephone Service Markets?	230	(1)
Monopoly Defined	230	(3)
Sources of Monopoly: Barriers to Entry and Cost Advantages	231	(1)
Natural Monopoly	232	(1)
The Monopolist's Supply Decision	233	(6)
Determining the Profit-Maximizing Output	234	(1)
Comparing Monopoly and Perfect Competition	235	(2)
Monopoly is Likely to Shift Demand	237	(1)
Monopoly is Likely to Shift Cost Curves	238	(1)
On Balance, Can Anything Good Be Said About Monopoly?	239	(1)
Monopoly May Aid Innovation	239	(1)
Natural Monopoly: Where Single-Firm Production Is Cheapest	239	(1)
Price Discrimination Under Monopoly	239	(3)
Is Price Discrimination Always Undesirable?	241	(1)
The Puzzle Resolved: Competitive Local Telephone Service	242	(1)
Summary	243	(1)
Key Terms	244	(1)
Questions for Review	244	(1)
Between Competition and Monopoly	245	(24)
Some Puzzling Observations	246	(2)
Monopolistic Competition	248	(3)
Characteristics of Monopolistic Competition	248	(1)
Price and Output Determination under Monopolistic Competition	249	(1)
The Excess Capacity Theorem and Resource Allocation	250	(1)
Explaining the Abundance of Retailers	251	(1)
Oligopoly	252	(1)
Why Oligopolists Advertise But Perfectly Competitive Firms Generally do Not	252	(6)
Why Oligopolistic Behavior Is So Hard to Analyze	253	(1)
A Shopping List	254	(3)
Sales Maximization: An Oligolopoly Model With Interdependence Ignored	257	(1)
The Kinked Demand Curve Model	258	(6)
The Game-Theory Approach	260	(4)
Monopolistic Competition, Oligopoly, and Public Welfare	264	(2)
A Glance Backward: Comparing the Four Market Forms	266	(1)
Summary	267	(1)
Key Terms	267	(1)
Questions for Review	267	(2)
The Market Mechanism: Shortcomings and Remedies	269	(22)
Why are Health-Care Costs in Canada Rising?	270	(1)
What Does the Market Do Poorly?	270	(1)
Efficient Resource Allocation: A Review	271	(1)
Externalities: Getting the Prices Wrong	272	(4)
Externalities and Inefficiency	273	(1)
Externalities Are Everywhere	274	(1)
Government Policy and Externalities	275	(1)
Provision of Public Goods	276	(1)
Allocation of Resources Between Present and Future	277	(2)
The Role of the Interest Rate	277	(1)
How Does It Work in Practice?	278	(1)
Market Failure and Government Failure	279	(1)
The Cost Disease of the Service Sector	279	(5)
Deteriorating Personal Services	279	(1)
Personal Services Are Getting More Expensive	280	(1)
Why Are Personal Services Getting Worse but Costing More?	281	(1)
Uneven Labor Productivity Growth in the Economy	282	(1)
A Future of More Goods but Fewer Services: Is It Inevitable?	283	(1)
Government May Make the Problem Worse	283	(1)
Explaining the Rising Costs of Canadian Health Care	284	(1)
Some Other Sources of Market Failure	285	(2)
Imperfect Information	285	(1)
Rent Seeking	285	(1)
Moral Hazard	286	(1)
The Market System on Balance	287	(1)
Epilogue: The Unforgiving Market, Its Gift of Abundance, and its Dangerous Friends	287	(1)
Summary	288	(1)
Key Terms	289	(1)
Questions for Review	289	(2)
Microeconomics of Innovation: Prime Engine of Growth	291	(16)
The Big Puzzle: Why do All Rival Economic Systems Trail So Far Behind Free Market Growth Rates?	293	(1)
The Free Market's Growth Record	293	(2)
Innovation and the Growth Process	294	(1)
What Is Different About Free-Market Economies?	294	(1)
Innovation Versus Price as the Prime Competitive Weapon	295	(7)
How Much Will the Profit-Maximizing Firm Spend on Innovation?	296	(1)
The Profits of Innovation	297	(1)
Reducing Risk by Sharing Technology	298	(1)
A Kinked Revenue Curve Model of Spending on Innovation	299	(3)
Three Growth-Creating Properties of Innovation	302	(1)
Cumulative Innovation	302	(1)
The Public Good Property of Innovation	302	(1)
The Accelerator Property of Innovation	303	(1)
Do Free Markets Spend Enough on R&D Activities?	303	(2)
Innovation as a Positive Externality	304	(1)
Effects of Process Research on Amounts of Goods Produced and on Their Prices	305	(1)
The Puzzle Revisited: Extraordinary Growth in Free-Market Economies	305	(1)
Summary	306	(1)
Key Terms	306	(1)
Questions for Review	306	(1)
Real Firms and Their Financing: Stocks and Bonds	307	(20)
The Stock Market's Unpredictability	308	(1)
Firms in the United States	308	(4)
Proprietorships	309	(1)
Partnerships	309	(1)
Corporations	310	(1)
The Effect of Double Taxation of Corporate Earnings	311	(1)
Financing Corporate Activity	312	(3)
Loans	312	(1)
Stocks and Bonds	312	(2)
Plowback, or Retained Earnings	314	(1)
From the Investor's Viewpoint: Buying Stocks and Bonds	315	(2)
Selecting a Portfolio: Diversification	315	(1)
Following a Portfolio's Performance	316	(1)
Stock Exchanges and Their Functions	317	(2)
Regulation of the Stock Market	318	(1)
Stock Exchanges and Corporate Capital Needs	319	(1)
Speculation	319	(3)
Unpredictable Stock Prices as ``Random Walks''	322	(3)
Summary	325	(1)
Key Terms	326	(1)
Questions for Review	326	(1)
PART IV The Distribution of Income	327	(76)
Pricing the Factors of Production	329	(22)
The Principle of Marginal Productivity	330	(1)
Inputs and Their Derived Demand Curves	331	(2)
Investment, Capital, and Interest	333	(4)
The Demand for Funds	334	(1)
The Downward-Sloping Demand Curve for Funds	335	(1)
The Supply of Funds	336	(1)
The Issue of Usury Laws: Are Interest Rates Too High?	336	(1)
The Determination of Rent	337	(7)
Land Rents: Complicated Version	338	(2)
Generalization: Economic Rent Seeking	340	(2)
An Application of Rent Theory: Shaquille O'Neal's Salary	342	(1)
Rent Controls: The Misplaced Analogy	343	(1)
Payments to Entrepreneurship: Are Profits Too High or Too Low?	344	(3)
What Accounts for Profits?	345	(1)
Taxing Profits	346	(1)
Criticisms of Marginal Productivity Theory	347	(1)
Summary	348	(1)
Key Terms	348	(1)
Questions for Review	348	(1)
Appendix: Discounting and Present Value	349	(1)
Summary	350	(1)
Key Terms	350	(1)
Questions for Review	350	(1)
Labor: The Human Input	351	(28)
Do Cheap Foreign Labor and Technological Progress Contribute to Lagging Wages?	353	(1)
Wage Determination in Competitive Labor Markets	354	(3)
The Demand for Labor and the Determination of Wages	354	(1)
Influences on MRPL: Shifts in the Demand for Labor	355	(1)
Technical Change, Productivity Growth, and the Demand for Labor	355	(1)
The Service Economy and the Demand for Labor	356	(1)
The Supply of Labor	357	(4)
Rising Labor-Force Participation	357	(2)
An Important Labor Supply Puzzle	359	(1)
The Labor Supply Puzzle Resolved	360	(1)
Why Do Wages Differ?	361	(6)
Labor Demand in General	362	(1)
Labor Supply in General	362	(1)
Ability and Earnings: The Rent Component of Wages	363	(1)
Investment in Human Capital	363	(1)
Education and Earnings: Dissenting Views	364	(1)
The Effects of Minimum Wage Legislation	365	(2)
Unions and Collective Bargaining	367	(4)
The Development of Unionism in America	368	(2)
Unions as Labor Monopolies	370	(1)
Foreign Competition, Technology, and American Jobs: Are Union Fears Justified?	371	(4)
Monopsony and Bilateral Monopoly	372	(1)
Collective Bargaining and Strikes	373	(2)
Summary	375	(1)
Key Terms	376	(1)
Questions for Review	376	(3)
Poverty, Inequality, and Discrimination	379	(24)
Ending Welfare as we Know it	380	(1)
The Facts: Poverty	381	(3)
Counting the Poor: The Poverty Line	382	(1)
Absolute versus Relative Poverty	383	(1)
The Facts: Inequality	384	(3)
Depicting Income Distributions: The Lorenz Curve	385	(2)
Some Reasons for Unequal Incomes	387	(1)
The Facts: Discrimination	388	(1)
The Economic Theory of Discrimination	389	(3)
Discrimination by Employers	390	(1)
Discrimination by Fellow Workers	390	(1)
Statistical Discrimination	391	(1)
The Roles of the Market and the Government	392	(1)
The Optimal Amount of Inequality	392	(1)
The Trade-Off Between Equality and Efficiency	393	(2)
Policies to Combat Poverty	395	(3)
Education as a Way Out	395	(1)
The Welfare Debate	395	(1)
Welfare Reform and the Trade-off	396	(1)
The Negative Income Tax	396	(2)
Other Policies to Combat Inequality	398	(1)
The Personal Income Tax	398	(1)
Death Duties and Other Taxes	398	(1)
Policies to Combat Discrimination	398	(2)
A Look Back	400	(1)
Summary	400	(1)
Key Terms	401	(1)
Questions for Review	401	(2)
PART V The Government and the Economy	403	(96)
Limiting Market Power: Regulation and Antitrust	405	(28)
The Public Interest Issue: Monopoly Power Versus Mere Size	406	(1)
Regulation	407	(1)
How and Why Did Regulation Arise?	407	(1)
What is Regulated? By Whom?	408	(1)
Why Do Regulators Often Raise Prices?	408	(1)
Some Objectives of Regulation	409	(3)
Control of Market Power Resulting from Economies of Scale and Scope	409	(1)
Monopoly Power and the Prices of ``Bottleneck'' Facilities	409	(2)
Universal Service and Rate Averaging	411	(1)
Two Key Issues That Face Regulators	412	(1)
How Can Regulators Set Prices That Best Protect Consumers' Interests But Enable Regulated Firms to Cover Their Costs?	412	(4)
Marginal versus Average Cost Pricing	413	(1)
Preventing Monopoly Profit but Keeping Incentives for Efficiency and Innovation	414	(2)
The Pros and Cons of ``Bigness''	416	(1)
Economies of Large Size	416	(1)
Required Scale for Innovation	416	(1)
Deregulation	417	(2)
The Effects of Deregulation	417	(2)
The Reason Why Regulators Often Push Prices Upward	419	(1)
Antitrust Laws and Policies	420	(1)
The Public Image of Business When the Antitrust Laws Were Born	420	(1)
The Antitrust Laws	421	(2)
Sherman Act	422	(1)
Clayton Act of 1914	422	(1)
FTC Act	423	(1)
Robinson-Patman Act	423	(1)
Measuring Market Power: Concentration	423	(2)
The Evidence on Concentration in Reality	424	(1)
A Crucial Problem for Antitrust: The Resemblance of Monopolization and Vigorous Competition	425	(1)
Anticompetitive Practices and Antitrust	426	(1)
Predatory Pricing	426	(1)
Other Possibly Anticompetitive Practices: Bottleneck Pricing and Bundling	426	(1)
Mergers and Competition	427	(1)
Use of Antitrust Laws to Prevent Competition	428	(1)
Concluding Observations	429	(1)
Summary	430	(1)
Key Terms	431	(1)
Questions for Review	431	(2)
Taxation and Resource Allocation	433	(20)
Should we Flatten the Income Tax?	434	(1)
The Level and Types of Taxation	434	(2)
Progressive, Proportional, and Regressive Taxes	435	(1)
Direct versus Indirect Taxes	435	(1)
The Federal Tax System	436	(3)
The Federal Personal Income Tax	436	(1)
The Payroll Tax	437	(1)
The Corporate Income Tax	437	(1)
Excise Taxes	438	(1)
The Payroll Tax and the Social Security System	438	(1)
The State and Local Tax System	439	(2)
Sales and Excise Taxes	440	(1)
Property Taxes	440	(1)
Fiscal Federalism	440	(1)
The Concept of Equity in Taxation	441	(1)
Horizontal Equity	441	(1)
Vertical Equity	441	(1)
The Benefits Principle	442	(1)
The Concept of Efficiency in Taxation	442	(4)
Tax Loopholes and Excess Burden	445	(1)
Shifting The Tax Burden: Tax Incidence	446	(2)
The Incidence of Excise Taxes	447	(1)
The Incidence of the Payroll Tax	447	(1)
When Taxation Can Improve Efficiency	448	(1)
Equity, Efficiency, and the Optimal Tax	449	(1)
Conclusion: The Pros and Cons of a Flat Tax	450	(1)
Summary	451	(1)
Key Terms	451	(1)
Questions for Review	452	(1)
Externalities, The Environment, and Natural Resources	453	(24)
The Economics of Environmental Protection	454	(1)
Externalities: A Critical Shortcoming of the Market Mechanism	454	(5)
The Facts: Is Everything Really Getting Steadily Worse?	454	(4)
The Law of Conservation of Matter and Energy	458	(1)
The Role of Individuals and Governments in Environmental Damage	459	(1)
Environmental Damage as an Externality	459	(1)
Supply-Demand Analysis of Environmental Externalities	459	(2)
Basic Approaches to Environmental Policy	461	(5)
Emissions Taxes versus Direct Controls	462	(2)
Another Financial Device to Protect the Environment: Emissions Permits	464	(2)
Two Cheers for the Market	466	(1)
The Economics of Natural Resources	467	(1)
Those Resilient Resource Supplies	467	(1)
Economic Analysis: The Free Market and Pricing of Depletable Resources	467	(4)
Scarcity and Rising Prices	468	(2)
Supply-Demand Analysis and Consumption	470	(1)
Actual Resource Prices in the 20th Century	471	(3)
Interferences with Price Patterns	471	(1)
Is Price Interference Justified?	472	(1)
On the Virtues of Rising Prices	473	(1)
Growing Reserves of Exhaustible Resources	474	(1)
Summary	474	(1)
Key Terms	474	(1)
Questions for Review	475	(2)
International Trade and Comparative Advantage	477	(22)
How Can Americans Compete with ``Cheap Foreign Labor''?	478	(1)
Why Trade?	479	(1)
Mutual Gains from Trade	480	(1)
International Versus International Trade	480	(1)
Political Factors in International Trade	481	(1)
The Many Currencies Involved in International Trade	481	(1)
Impediments to Mobility of Labor and Capital	481	(1)
The Law of Comparative Advantage	481	(4)
The Arithmetic of Comparative Advantage	482	(1)
The Graphics of Comparative Advantage	483	(2)
Comparative Advantage Exposes the Fallacy of ``Cheap Foreign Labor''	485	(1)
Supply-Demand Equilibrium and Pricing in World Trade	486	(1)
Tariffs, Quotas, and Other Interferences with Trade	487	(3)
How Tariffs and Quotas Work	488	(2)
Tariffs versus Quotas	490	(1)
Why Inhibit Trade?	490	(3)
Gaining a Price Advantage	490	(1)
Protecting Particular Industries	491	(2)
Other Arguments for Protection	493	(2)
National Defense and Other Noneconomic Considerations	493	(1)
The Infant-Industry Argument	493	(1)
Strategic Trade Policy	493	(2)
Can Cheap Imports Hurt a Country?	495	(1)
A Last Look at the ``Cheap Foreign Labor'' Argument	496	(1)
Summary	496	(1)
Key Terms	497	(1)
Questions for Review	497	(2)
Glossary	499	(8)
Index	507