From the archives: Economics

(from "The Renaissance Page", circa 1995)



Another subject that I hold dear. I adore the simplicity of economics, almost as much as its accuracy. The New Classicals have what my dad would call a "Good Point" almost every time they open their mouths.

My latest deals with taxes, and the power of government. (This will be discussed further in Philosophy.) Imagine there are but two types of firms: monopolies and perfect competitors. I know, in reality nobody is either; but, if you filter and carefully select your inputs, you can compare firms like this. If the State (my word for the government of the US) needs control of a firm, its easiest recourse is to tax. But there is more to it than that.

In the case of a monopoly, let's take OPEC and the gasoline industry, the government saw an opportunity to fund the Department of Transportation. The more a consumer drives, the more money that driver should give to the DOT. Therefore, a per unit tax has been imposed on gas. You see, a firm produces where its marginal cost equals its marginal revenue. In a monopoly, the amount the average cost exceeds the marginal cost is the excess profits of the firm. If a per unit tax (a la the gas tax) is imposed on gasoline the average cost will be affected along with the marginal cost. Less gas will be desired, at a higher price, but the firm will suffer no loss of profits. Thus, the government has gotten the tax money from the consumers, the consumers don't know, and the firms are not hurt.

Now let's take a monopoly such as the caviar import trade. The government would really like to see it shut down. They know that, as a luxury, caviar has a very elastic demand curve. Therefore, a lump sum tax that effects average cost, but nothing else, will cut heavily into the firm's profits.

This is just something to think about. Run the curves (Basic Micro should get you through it) and see what you think then drop me a line. Remember - the more you think, the better off everyone is.

Comments are closed