Tipos de adquisiciones por fuente de Energía Renovable

Topic: Externalities Skill: Recognition

1) What is an externality?

Answer: An external cost is a cost borne by a party not involved in a transaction. An external benefit is a benefit enjoyed by a party not involved in a transaction.

Topic: The Economic Theory of Government Skill: Recognition

2) What are the two main economic reasons why

governments exist?

Answer: First, governments establish and maintain property rights and set the rules for the redistribu- tion of income and wealth. Second, governments provide mechanisms for allocating scarce resources when the market economy results in inefficiency.

Topic: Public Choice and the Political Marketplace Skill: Recognition

3) Who are the actors in the political marketplace? Answer: The actors in the political market place are

voters, firms, politicians, and bureaucrats.

Topic: Public Choice and the Political Marketplace Skill: Recognition

4) Who are the demanders and who are the suppliers

in the political market place? How do the deman- ders “pay” the suppliers?

Answer: The demanders are voters and firms. The suppliers are politicians and bureaucrats. The de- manders “pay” the suppliers with their votes, campaign contributions, and taxes.

Topic: Political Equilibrium Skill: Recognition

5) What is meant by the term “political equilib- rium”?

Answer: A political equilibrium occurs when the choices of voters, politicians, and bureaucrats are compatible, and no group can improve its posi- tion by making a different choice.

Topic: Market Intervention Skill: Conceptual

6) What is the difference between economic regula- tion and antitrust law?

Answer: Economic regulation generally involves the determination of prices that regulated firms can charge and control over entry into the industry. Regulation is administered by government regula- tory agencies such as state public utility commis- sions and many federal commissions such as the FCC. Antitrust law has to do with the prohibition of monopoly type behavior, such as price-fixing, or certain mergers that would result in monopoly power. The major antitrust laws are the Sherman Act, the Clayton Act, and the Federal Trade Commission Act. They are enforced through the judicial system.

Topic: Regulation Skill: Recognition

7) Although regulatory agencies vary in scope, size, and in the economic aspects they control, and ex- ist at all levels of government, what features do all such agencies have in common?

Answer: All regulatory agencies have political ap- pointees, bureaucracies, industry experts, budgets, and operating rules for controlling prices as well as other aspects of economic performance. Regula- tory agencies also control production quantities, the nature of the good or service, and the markets that will be served. However they rarely specify the exact details of the firms’ production proc- esses.

Topic: Scope of Regulation Skill: Recognition

8) In the United States since the 1970s, has regula- tion tended to increase or decrease?

Answer: Since the middle of the 1970s, there has been a tendency to deregulate, which means that regulation has tended to decrease.

Topic: Economic Theory of Regulation Skill: Conceptual

9) What is meant by the “economic theory of regula- tion”?

Answer: The economic theory of regulation is part of the theory of public choice and is based on the supply of and demand for regulation. Regulation is demanded by certain consumers and/or certain firms and is supplied by government. Given the supply and demand, a political equilibrium emerges at some quantity of regulation.

Topic: Social interest Skill: Recognition

10) Explain the social interest theory of regulation. Answer: The social interest theory of regulation is

that politicians supply the regulation that achieves an efficient allocation of resources. According to this theory, the political process works well to find inefficiencies and eliminate them through regula- tions.

Topic: Social interest Skill: Recognition

11) “Under the social interest theory of regulation, regulators attempt to maximize profits for the public owners of the firms being regulated.” Is the previous statement correct or incorrect?

Answer: The statement is incorrect. The social inter- est theory is the theory that regulators seek an effi- cient use of resources. The capture theory of regu- lation is the theory that regulators attempt to maximize the producers’ economic profit.

Topic: Capture Theory Skill: Recognition

12) “The theory that regulation seeks an efficient use of resources is called the capture theory of regula- tion.” Is the previous statement correct or incor- rect?

Answer: The statement is incorrect. The capture the- ory is the theory that the regulated producers “capture” the regulators and so the regulators help the producers maximize their economic profit. The theory that regulation seeks an efficient use of resources is the “social interest” theory.

Topic: Capture Theory Skill: Conceptual

13) What is the idea behind the capture theory of regulation?

Answer: Capture theory assumes that the marginal cost of regulation is high, but there is a specific group that receives a high marginal benefit (a spe- cial interest group) from the regulation. If the group has low organization costs, the regulations likely will be imposed. If the costs of regulation are spread thinly, the regulation does not decrease votes (and so aren’t costly to politicians). As a re- sult, regulations can help producers, the special interest group, to maximize their profit.

Topic: Social interest and Capture Theory Skill: Recognition

14) What are the two major economic theories of regulation and what is the difference between them?

Answer: First is the social interest theory, which sees regulation as supplied by government to achieve efficiency and eliminate deadweight loss. Second is the capture theory, which sees regulation as supplied to satisfy the demand of producers who want to maximize their producer surplus or eco- nomic profit.

Topic: Social interest and Capture Theory Skill: Recognition

15) What is the social interest theory of regulation? How does it differ from the capture theory of regulation?

Answer: The social interest theory of regulation is that regulators seek an efficient use of resources. The capture theory asserts that producers “cap- ture” the regulators so that the regulation is de- signed to help the producers maximize their eco- nomic profit.

Topic: Social interest and Capture Theory Skill: Recognition

16) Describe the difference between social interest theory of regulation and the capture theory or regulation.

Answer: Both are theories of regulation but they dif- fer according to what they see as to the goal of the regulation. The social interest theory assumes that regulation that seeks an efficient use of resources. It asserts that the political process works to elimi- nate deadweight loss by using appropriate regula-

tions. The capture theory proposes that producers bend the regulators to their will so that resources are not used efficiently because regulated market outcomes favor producers. Everyone else but pro- ducers bears the cost of this regulation. Because this cost is a small amount per person, no one finds it worthwhile to propose legislation to avoid it.

Topic: Natural Monopoly Skill: Recognition

17) What is a natural monopoly and what problem does natural monopoly pose for regulators? Answer: A natural monopoly is a firm that can supply

the market at lower cost than two or more firms. It can do so because it has declining long-run av- erage total cost over the entire range of market output. Because the ATC is declining, the mar- ginal cost must be below the ATC. Therefore, if the regulator forces the firm to price at MC to achieve efficiency (such as is done by a perfectly competitive firm), the natural monopolist will fail to cover its total cost. It incurs an economic loss and requires a government subsidy to survive.

Topic: Natural Monopoly Skill: Conceptual

18) Why are water companies considered a natural monopoly?

Answer: Once one water company incurs the cost of establishing a physical connection to one custom- ers’ home or place of business, the marginal cost of providing service falls rapidly over time as more and more service is provided. For instance, once a main pipe is buried under a street, adding addi- tional customers on the street is relatively cheap. Economies of scale make it very cost prohibitive for another firm to enter the market, leaving one water company as the provider of the service in that area.

Topic: Natural Monopoly, Marginal Cost Pricing Rule

Skill: Conceptual

19) “A single-price natural monopoly that is regulated to set price equal to marginal cost will always in- cur an economic loss.” True or false? Explain. Answer: The statement is true. A natural monopoly’s

average total cost is falling as its output increases. This means that marginal cost is below average to- tal cost. Because price equals marginal cost, price

is less than average total cost so that the firm in- curs an economic loss.

Topic: Natural Monopoly, Marginal Cost Pricing Rule

Skill: Conceptual

20) “If a natural monopoly is regulated using a mar- ginal cost pricing rule, the firm earns a normal profit.” Is the previous statement correct or incor- rect?

Answer: The statement is incorrect. If a firm is regu- lated using a marginal cost pricing rule, the firm incurs an economic loss.

Topic: Natural Monopoly, Marginal Cost Pricing Rule

Skill: Conceptual

21) “If Michigan’s electric utilities were allowed to use marginal cost pricing, it would lead to economic profits for these utilities.” Is the previous state- ment correct or incorrect?

Answer: The statement is incorrect. Imposing mar- ginal cost pricing on natural monopolies results in the firms incurring economic losses not economic profits.

Topic: Natural Monopoly, Marginal Cost Pricing Rule

Skill: Conceptual

22) If a natural monopoly is regulated using the mar- ginal cost pricing rule, how will that affect prices, outputs, profits, and the distribution of surpluses? What are the pros and cons to this method of regulation?

Answer: The marginal cost pricing rule sets the regu- lated price equal to the price where the marginal cost curve intersects the demand curve. This price is lower than the monopoly price, and results in a higher level of output. The monopoly’s economic profit is eliminated; in fact, this rule results in the firm making economic losses, as marginal cost is less than average total cost for a natural monop- oly. Because output increases to the point where marginal cost equals price, consumer surplus is maximized. The advantage of this method of regulation is that it results in the efficient level of output. The disadvantage of this method is that means the firm will incur an economic loss. Unless subsidized by the government, the firm will eventually exit the industry, as no firm can operate at a loss in the long run.

Topic: Natural Monopoly, Average Cost Pricing Rule

Skill: Conceptual

23) What is an average cost pricing rule? Why do regulatory agencies use it for natural monopolies? Answer: Average cost pricing means that the firms

will equate their price to their average total cost. It is used by regulatory agencies, because if a natural monopoly is forced to charge a perfectly competi- tive price (using a marginal cost pricing rule), the firm will not be able to cover its costs. No firm can operate on losses, so average cost pricing is considered a second-best solution: it allows the natural monopoly to make a normal profit but does not allow it to set its price as high as it would were it unregulated.

Topic: Natural Monopoly, Cost Inflation Skill: Conceptual

24) Why do some utilities have an incentive to exag- gerate their costs of production?

Answer: Because utilities are generally allowed to charge prices that cover their average cost of pro- duction, a utility might want to incur higher than normal costs (maybe from lush carpets, hunting lodges, tickets to sporting events, and so forth). If the utility exaggerates its costs, the regulators are likely to simply order higher rates to cover the higher costs, and so the utility executives can en- joy benefits (the carpet, hunting lodge, sporting events) without incurring any personal costs.

Topic: Natural Monopoly, Cost Inflation Skill: Conceptual

25) How can managers of natural monopolies exag- gerate their costs?

Answer: By increasing on-the-job luxury items such as sumptuous office suites, limousines, golf com- petitions at expensive locations, company jets, and other non-necessary expenditures, the managers can exaggerate their costs over what is truly neces- sary to produce the product.

Topic: Rate of Return Regulation Skill: Conceptual

26) What potential problem is there with rate of re- turn pricing?

Answer: The monopolist might exaggerate its costs and mislead the regulator. In this case, the regula- tor allows the firm to increase its price, so the

monopolist has no incentive to operate efficiently and cost effectively.

Topic: Rate of Return Regulation Skill: Conceptual

27) Describe the main problem with rate of return regulation and name an alternative regulatory scheme that has been devised to deal with that problem.

Answer: The main problem with rate of return regu- lation is that a firm might be inclined to inflate its costs, because its price is set at a level that permits the firm to recoup all its costs. Therefore, the firm might incur unnecessary costs that serve the inter- ests of its managers, such as lavish offices, com- pany cars, travel, entertainment, etc. The alterna- tive regulation schemes is price cap regulation. With price cap regulation, the regulating agency sets the maximum price the company can charge. The company is allowed to charge any price below the cap and can keep all (or some) of any eco- nomic profit it can earn.

Topic: Price Cap Regulation Skill: Conceptual

28) What incentive does price cap regulation attempt to give the firm? How does it give the firm this incentive?

Answer: Price cap regulation is intended to motivate the firm to operate efficiently and keep its costs under control. It does so setting the maximum price the company can charge and then allowing the firm to keep part (or perhaps all) of any eco- nomic profit it can earn if it cuts its costs.

Topic: Price Cap Regulation Skill: Conceptual

29) Explain the difference between price cap regula- tion in a natural monopoly and the effect of a price ceiling in a competitive market.

Answer: In regulating a natural monopoly, a price cap regulation is a price ceiling in which a rule speci- fies the highest price that the firm is allowed to charge. A price cap lowers the price and increases output. This type of regulation gives a firm an in- centive to operate efficiently and to keep its costs under control. In a competitive market, a price ceiling establishes the highest price that all firms in the market are allowed to charge. But the major issue is that in a competitive market, the competi- tive equilibrium already is generally efficient. And,

to be effective, the price ceiling needs to be below the market equilibrium price. A shortage of the good occurs because firms are willing to supply less output than they would produce in the ab- sence of the price ceiling. As a result, inefficiency is created.

Topic: Natural Monopoly, Regulation Skill: Conceptual

30) Briefly describe and discuss the different ways a natural monopoly can be regulated: Marginal cost pricing, average cost pricing, rate of return regula- tion, and price cap regulation.

Answer: Marginal cost pricing: The regulated price is set equal to marginal cost. In this case, the effi- cient quantity is produced so there is no dead- weight loss. Consumer surplus is maximized. The firm incurs an economic loss unless it can raise revenues in an additional way, such as using price discrimination or a two-part tariff.

Average cost pricing: The regulated price is set equal to average cost. While this form of regula- tion does not produce an efficient outcome, it al- lows firms to earn a normal profit. There is a deadweight loss.

Rate of return regulation: The regulated price enables a regulated firm to earn a specified target percent return on its capital. If a regulator could observe the firm’s total cost and also know that the firm minimized total cost, the regulation would be the same as average cost pricing. In some cases, however, the firm is able to “capture” the regulator, which enables the firm to exaggerate it costs and so set its price and produce the amount of output that it would were it an un- regulated monopoly.

Price cap regulation: The regulator sets a price ceiling. The firm can charge any price it wants be- low the price cap and keep some or all of any eco- nomic profit it earns. This regulation induces the firm to operate efficiently and control costs. If the firm earns a profit that is too high, the regulator might impose earnings share regulation, which re- quire the firm to make refunds to customers when profits rise above a target level.

Topic: Cartel Regulation Skill: Conceptual

31) Do firms in a cartel support regulation that limits the amount each firm can produce? Explain your answer.

Answer: Firms in a cartel definitely support regula- tion that limits the amount each firm can pro- duce. The major problem faced by firms in a car- tel is “cheating” by firms on the cartel agreement to limit production. Firms cheat by increasing their production beyond the assigned limit be- cause each firm knows that if it, and it alone cheats, its profits will increase dramatically. Regu- lation that limits production can eliminate cheat- ing and ensure that the cartel, and hence the firms within it, earn an economic profit.

Topic: Social interest or Capture? Skill: Conceptual

32) Is there any evidence in support of the capture theory of regulation?

Answer: Yes. In the airline and trucking industries, rates of return were much higher when they were regulated than after they were deregulated. After deregulation, the gain in consumer surplus in both industries was greater than the gain in pro- ducer surplus. Both of these pieces of evidence suggest that regulation of these industries served the interests of the producers, thereby supporting the capture theory.

Topic: Sherman Act Skill: Conceptual

33) What is the Sherman Act and what is its purpose? Answer: The Sherman Act of 1890 was the first ma-

jor piece of federal antitrust legislation. It prohib- its two things. First, it prohibits any combination, trust, or conspiracy to restrict interstate or inter- national trade. Second, it prohibits monopoliza- tion or any attempt to monopolize interstate or international trade.

Topic: Sherman Act Skill: Conceptual

34) Does section 2 of the Sherman Act make it a fel- ony to “attempt” to monopolize an industry or must the attempt succeed before it is a felony? Answer: Section 2 of the Sherman Act makes at-

tempting to monopolize an industry a felony. It is not necessary for the attempt to succeed.

Topic: Clayton Act Skill: Recognition

35) “The Clayton Act repealed the Sherman Act so that only the Clayton Act remains in force.” Is the previous statement correct or incorrect?