Managerial Economics: Comprehensive Learning Assessment 2
CLA 2 Comprehensive Learning Assessment 2
Please read the following scenario and answer the questions below by providing the analysis based on the relevant theories and applicable examples. Include the following CLOs in your answer- CLO 2, CLO 5, CLO 8
CLO2- Analyze demand, supply, equilibrium prices, and price elasticities as a quantitative tool to forecast changes in revenues.
CLO5- Investigate the conditions under which a firm operates as perfectly competitive, monopolistically competitive, or a monopoly
CLO8- Evaluate and present the economic basis for limit pricing, and identify the conditions under which a firm can profit from such a strategy.
If your business earns superior profits, existing and potential competitors will do their best to get a piece of the success. It is essential for firms to examine a variety of business strategies to enhance the prospects of sustainable profitability. Out of all factors that impact an industrys sustainable profitability, this CLA2 assessment focuses on the most damaging threat to sustainable profit, the entry of competitors into the market.
Entry into the market heightens competition and reduces the margins of existing firms in a wide variety of industry settings. For this reason, the ability of existing firms to sustain profits depends on how barriers to entry affect the ease with which other firms can enter the industry including the formation of new companies (Wendys entered the fast-food industry in the 1970s); globalization strategies by foreign companies (Toyota entered the U.S. automobile market the middle of the last century) , and the introduction of new product lines by existing firms (computer manufacturer Apple now also sells the popular iPhone).
Your CLA2 is a paper of minimum ten pages, APA 7 formatted, including one Industry Report and one Company Report that you recommend to the CEO of a company how to create a moat and prevent the threat of entry to the market.
Industry Report
Please select an industry and write a rigorous industry report for your selected industry that incorporate the followings:
The market structure of the industry by determining the concentration ratio in the industry and how market structure affects the entry into the market
The nature of industry and the network effects
The production structure of the industry, initial capital requirements, sunk costs, and economies of scale
The prospect of industry in the future in regard to technological innovations
Company Report
Now assume you are managing a company in this industry and are asked to write a Company Report about the long term strategic decision making of the company. The purpose of this report is to recommend a few policies to the CEO that assures a sustainable competitive advantage and long term profitability for the company.
Please include the following variables in your Company Report:
Sustainable market share and how it can be achieved
Branding, reputation, and a considerable base of loyal consumers
The managerial efficiency in strategic decision making regarding:
The integration and merger activity, vertical and horizontal integration
Preventing entry of rivals by pricing and cost policies such as limit pricing, predatory pricing, and raising rivals fixed or marginal costs
Issues in
EconomicsToday
Eighth Edition
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Issues in
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ROBERT C. GUELL
Indiana State University
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ISSUES IN ECONOMICS TODAY, EIGHTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright 2018 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. Previous editions 2015, 2012, and
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Guell, Robert C., author.
Issues in economics today/Robert C. Guell, Indiana State University.
Eighth edition. | New York, NY : McGraw-Hill Education, [2018]
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To Susan, Katie, Manny, Angel, Matt, and Lilly
gue46399_fm_i-xxxii.indd 5 16/03/17 2:50 PM
vi
About the Author
Dr. Robert C. Guell (pronounced Gill) is a professor of economics at Indiana State University
in Terre Haute, Indiana. He earned a B.A. in statistics and economics in 1986 and an M.S. in
economics one year later from the University of MissouriColumbia. In 1991, he earned a Ph.D.
from Syracuse University, where he discovered the thrill of teaching. He has taught courses for
freshmen, upper-division undergraduates, and graduate students from the principles level, through
public finance, all the way to mathematical economics and econometrics.
Dr. Guell has published numerous peer-reviewed articles in scholarly journals. He has
worked extensively in the area of pharmaceutical economics, suggesting that the private
markets patent system, while necessary for drug innovation, is unnecessary and inefficient
for production.
In 1998, Dr. Guell was the youngest faculty member ever to have been given Indiana
State Universitys Caleb Mills Distinguished Teaching Award. His talent as a champion of
quality teaching was recognized again in 2000 when he was named project manager for the
Lilly Project to Transform the First-Year Experience, a Lilly Endowmentfunded project to
raise first-year persistence rates at Indiana State University. He was ISUs Coordinator of
First-Year Programs until January 2008, when he happily stepped aside to rejoin his depart-
ment full time.
Dr. Guells passion for teaching economics led him to request an assignment with the larg-
est impact. The one-semester general education basic economics course became the vehicle
to express that passion. Unsatisfied with the books available for the course, he made it his
calling to produce what you have before you todayan all-in-one readable issues-based text.
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vii
Brief Contents
Preface xviii
Issues for Different Course Themes xxviii
Required Theory Table xxx
1 Economics: The Study of Opportunity
Cost 1
2 Supply and Demand 19
3 The Concept of Elasticityand Consumer
and Producer Surplus 40
4 Firm Production, Cost, and Revenue 56
5 Perfect Competition, Monopoly, and
Economic versus Normal Profit 68
6 Every Macroeconomic Word You
Ever Heard: Gross Domestic Product,
Inflation,Unemployment, Recession,
andDepression 79
7 Interest Rates and Present Value 98
8 Aggregate Demand andAggregate
Supply 107
9 Fiscal Policy 119
10 Monetary Policy 131
11 Federal Spending 145
12 Federal Deficits, Surpluses, andthe
NationalDebt 155
13 The Housing Bubble 168
14 The Recession of 20072009: Causes
andPolicy Responses 177
15 Is Economic Stagnation the
NewNormal? 186
16 Is the (Fiscal) Sky Falling?: An
Examinationof Unfunded Social Security,
Medicare, and State and Local Pension
Liabilities 193
17 International Trade: Does It Jeopardize
American Jobs? 201
18 International Finance and Exchange
Rates 213
19 European Debt Crisis 222
20 Economic Growth and Development 231
21 NAFTA, CAFTA, GATT, TPP, WTO:
Are Trade Agreements Good for Us? 238
22 The Line between Legal and Illegal
Goods 248
23 Natural Resources, theEnvironment,
andClimateChange 258
24 Health Care 271
25 Government-Provided Health Insurance:
Medicaid, Medicare, and the Childrens
Health Insurance Program 283
26 The Economics of Prescription Drugs 296
27 So You Want to Be a Lawyer: Economics
andthe Law 304
28 The Economics of Crime 310
29 Antitrust 319
30 The Economics of Race and Sex
Discrimination 327
31 Income and Wealth Inequality:
WhatsFair? 339
32 Farm Policy 349
33 Minimum Wage 358
34 Ticket Brokers and Ticket Scalping 366
35 Rent Control 373
36 The Economics of K12 Education 379
37 College and University Education: Why Is
It So Expensive? 390
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viii Brief Contents
38 Poverty and Welfare 400
39 Head Start 411
40 Social Security 418
41 Personal Income Taxes 429
42 Energy Prices 440
43 If We Build It, Will They Come?
AndOther Sports Questions 455
44 The Stock Market and Crashes 467
45 Unions 478
46 Walmart: Always Low Prices
(and Low Wages)Always 488
47 The Economic Impact of Casino
and Sports Gambling 494
48 The Economics of Terrorism 499
Index 505
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ix
Table of Contents
Preface xviii
Issues for Different Course Themes xxviii
Required Theory Table xxx
Chapter 1
Economics: The Study of Opportunity
Cost 1
Economics and Opportunity Cost 1
Economics Defined 1
Choices Have Consequences 2
Modeling Opportunity Cost Using the Production
Possibilities Frontier 2
The Intuition behind Our First Graph 2
The Starting Point for a Production Possibilities Frontier 3
Points between the Extremes of a Production
PossibilitiesFrontier 3
Attributes of the Production Possibilities Frontier 5
Increasing and Constant Opportunity Cost 5
Economic Growth 6
How Is Growth Modeled? 6
Sources of Economic Growth 7
The Big Picture 7
Circular Flow Model: A Model That Shows the
Interactions of All Economic Actors 8
Thinking Economically 8
Marginal Analysis 8
Positive and Normative Analysis 8
Economic Incentives 9
Fallacy of Composition 9
Correlation Causation 10
Kick It Up a Notch: Demonstrating Constant and
Increasing Opportunity Cost on a Production
Possibilities Frontier 10
Demonstrating Increasing Opportunity Cost 11
Demonstrating Constant Opportunity Cost 11
Summary 11
Appendix 1A
Graphing: Yes, You Can. 15
Cartesian Coordinates 15
Please! Not Y = MX + B . . . Sorry. 16
What on Gods Green Earth Does This Have
to Do with Economics? 18
Chapter 2
Supply and Demand 19
Supply and Demand Defined 20
Markets 20
Quantity Demanded and Quantity Supplied 20
Ceteris Paribus 22
Demand and Supply 22
The Supply and Demand Model 22
Demand 22
Supply 23
Equilibrium 24
Shortages and Surpluses 25
All about Demand 25
The Law of Demand 25
Why Does the Law of Demand Make Sense? 25
All about Supply 26
The Law of Supply 26
Why Does the Law of Supply Make Sense? 26
Determinants of Demand 27
Taste 28
Income 28
Price of Other Goods 28
Population of Potential Buyers 29
Expected Price 29
Excise Taxes 29
Subsidies 29
The Effect of Changes in the Determinants of Demand
on the Supply and Demand Model 29
Determinants of Supply 31
Price of Inputs 31
Technology 32
Price of Other Potential Outputs 32
Number of Sellers 32
Expected Price 32
Excise Taxes 33
Subsidies 33
The Effect of Changes in the Determinants of
Supply on the Supply and Demand Model 33
The Effect of Changes in Price Expectations on the
Supply and Demand Model 35
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x Table of Contents
Kick It Up a Notch: Why the New Equilibrium? 35
Summary 37
Chapter 3
The Concept of Elasticityand Consumer
and Producer Surplus 40
Elasticity of Demand 41
Intuition 41
Definition of Elasticity and Its Formula 41
Elasticity Labels 42
Alternative Ways to Understand Elasticity 42
The Graphical Explanation 42
The Verbal Explanation 43
Seeing Elasticity through Total Expenditures 44
More on Elasticity 44
Determinants of Elasticity of Demand 44
Elasticity and the Demand Curve 44
Elasticity of Supply 46
Determinants of the Elasticity of Supply 47
Consumer and Producer Surplus 49
Consumer Surplus 49
Producer Surplus 49
Market Failure 50
Categorizing Goods 50
Kick It Up a Notch: Deadweight Loss 51
Summary 52
Chapter 4
Firm Production, Cost, and Revenue 56
Production 57
Just Words 57
Graphical Explanation 58
Numerical Example 58
Costs 59
Just Words 59
Numerical Example 60
Revenue 62
Just Words 62
Numerical Example 63
Maximizing Profit 64
Graphical Explanation 64
Numerical Example 64
Summary 65
Chapter 5
Perfect Competition, Monopoly, and
Economic versus Normal Profit 68
From Perfect Competition to Monopoly 69
Perfect Competition 69
Monopoly 70
Monopolistic Competition 70
Oligopoly 71
Which Model Fits Reality 71
Supply under Perfect Competition 73
Normal versus Economic Profit 73
When and Why Economic Profits Go to Zero 73
Why Supply Is Marginal Cost under Perfect Competition 74
Just Words 74
Numerical Example 74
Graphical Explanation 75
Summary 76
Chapter 6
Every Macroeconomic Word You
Ever Heard: Gross Domestic Product,
Inflation,Unemployment, Recession,
andDepression 79
Measuring the Economy 80
Measuring Nominal Output 80
Measuring Prices and Inflation 81
Problems Measuring Inflation 83
Real Gross Domestic Product and Why It Is Not
Synonymous with Social Welfare 86
Real Gross Domestic Product 86
Problems with Real GDP 86
Measuring and Describing Unemployment 87
Measuring Unemployment 87
Problems Measuring Unemployment 89
Types of Unemployment 90
Productivity 90
Measuring and Describing Productivity 90
Seasonal Adjustment 91
Business Cycles 92
Kick It Up a Notch: National Income and Product
Accounting 94
Summary 95
Chapter 7
Interest Rates and Present Value 98
Interest Rates 99
The Market for Money 99
Nominal Interest Rates versus Real Interest Rates 99
Present Value 100
Simple Calculations 100
Mortgages, Car Payments, and Other Multipayment
Examples 101
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Table of Contents xi
Future Value 102
Kick It Up a Notch: Risk and Reward 104
Summary 104
Chapter 8
Aggregate Demand andAggregate
Supply 107
Aggregate Demand 108
Definition 108
Why Aggregate Demand Is Downward
Sloping 108
Aggregate Supply 109
Definition 109
Competing Views of the Shape of Aggregate
Supply 109
Shifts in Aggregate Demand and Aggregate
Supply 110
Variables That Shift Aggregate Demand 110
Variables That Shift Aggregate Supply 113
Causes of Inflation 114
How the Government Can Influence
(but Probably Not Control) the Economy 115
Demand-Side Macroeconomics 115
Supply-Side Macroeconomics 115
Summary 116
Chapter 9
Fiscal Policy 119
Nondiscretionary and Discretionary
Fiscal Policy 119
How They Work 119
Using Aggregate Supply and Aggregate Demand
to Model Fiscal Policy 120
Using Fiscal Policy to
Counteract Shocks 121
Aggregate Demand Shocks 121
Aggregate Supply Shocks 122
Evaluating Fiscal Policy 123
Nondiscretionary Fiscal Policy 123
Discretionary Fiscal Policy 123
The Political Problems with Fiscal Policy 124
Criticism from the Right and Left 125
The Rise, Fall, and Rebirth of
Discretionary Fiscal Policy 125
The Obama Stimulus Plan 126
Kick It Up a Notch: Aggregate Supply
Shocks 128
Summary 128
Chapter 10
Monetary Policy 131
Goals, Tools, and a Model of Monetary Policy 132
Goals of Monetary Policy 132
Traditional and Ordinary Tools of Monetary Policy 132
Modeling Monetary Policy 133
The Monetary Transmission Mechanism 134
The Additional Tools of Monetary Policy Created
in2008 135
Central Bank Independence 137
Modern Monetary Policy 138
The Last 30 Years 138
Summary 143
Chapter 11
Federal Spending 145
A Primer on the Constitution andSpending Money 146
What the Constitution Says 146
Shenanigans 146
Dealing with Disagreements 147
Using Our Understanding of Opportunity Cost 148
Mandatory versus Discretionary Spending 148
Where the Money Goes 149
Using Our Understanding of Marginal Analysis 151
The Size of the Federal Government 151
The Distribution of Federal Spending 151
Budgeting for the Future 151
Baseline versus Current-Services Budgeting 151
Summary 152
Chapter 12
Federal Deficits, Surpluses, andthe
NationalDebt 155
Surpluses, Deficits, and the Debt: Definitions
andHistory 156
Definitions 156
History 156
How Economists See the Deficit and the Debt 159
Operating and Capital Budgets 159
Cyclical and Structural Deficits 159
The Debt as a Percentage of GDP 160
International Comparisons 160
Generational Accounting 161
Who Owns the Debt? 161
Externally Held Debt 162
A Balanced-Budget Amendment 162
Projections 165
Summary 166
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xii Table of Contents
Chapter 13
The Housing Bubble 168
How Much Is a House Really Worth? 168
Mortgages 170
How to Make a Bubble 172
Pop Goes the Bubble! 173
The Effect on the Overall Economy 174
Summary 175
Chapter 14
The Recession of 20072009: Causes
andPolicy Responses 177
Before It Began 177
Late 2007: The Recession Begins as Do the
Initial Policy Reactions 180
The Bottom Falls Out in Fall 2008 181
The Obama Stimulus Package 182
Extraordinary Monetary Stimulus 183
Summary 184
Chapter 15
Is Economic Stagnation the
NewNormal? 186
Periods of Robust Economic Growth 187
Sources of Growth 187
Causes and Consequences of Slowing
Growth 187
Causes 187
Consequences 188
What Can Be Done to Jump-Start Growth,
or Is This the New Normal? 189
Summary 191
Chapter 16
Is the (Fiscal) Sky Falling?: An
Examinationof Unfunded Social Security,
Medicare, and State and Local Pension
Liabilities 193
What Is the Source of the Problem? 193
How Big Is the Social Security andMedicare
Problem? 194
How Big Is the State and Local Pension
Problem? 196
Is It Possible That the Fiscal Sky Isnt
About to Fall? 198
Summary 199
Chapter 17
International Trade: Does It Jeopardize
American Jobs? 201
What We Trade and with Whom 201
The Benefits of International Trade 204
Comparative and Absolute Advantage 204
Demonstrating the Gains from Trade 205
Production Possibilities Frontier
Analysis 205
Supply and Demand Analysis 206
Whom Does Trade Harm? 206
Trade Barriers 207
Reasons for Limiting Trade 207
Methods of Limiting Trade 208
Trade as a Diplomatic Weapon 209
Kick It Up a Notch: Costs of Protectionism 210
Summary 210
Chapter 18
International Finance and Exchange
Rates 213
International Financial Transactions 213
Foreign Exchange Markets 215
Alternative Foreign Exchange Systems 217
Determinants of Exchange Rates 219
Summary 220
Chapter 19
European Debt Crisis 222
In the Beginning There Were 17 Currencies
in 17 Countries 222
The Effect of the Euro 223
Why Couldnt They Pull Themselves Out?
The United States Did 226
Is It Too Late to Leave the Euro? 228
Where Should Europe Go from Here? 229
Summary 229
Chapter 20
Economic Growth and Development 231
Growth in Already Developed Countries 231
Comparing Developed Countries and Developing
Countries 233
Fostering (and Inhibiting) Development 234
The Challenges Facing Developing Countries 235
What Works 236
Summary 236
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Table of Contents xiii
Chapter 21
NAFTA, CAFTA, GATT, TPP, WTO:
Are Trade Agreements Good for Us? 238
The Benefits of Free Trade 239
Why Do We Need Trade Agreements? 239
Strategic Trade 240
Special Interests 240
What Trade Agreements Prevent 240
Trade Agreements and Institutions 241
Alphabet Soup 241
Are They Working? 242
Economic and Political Impacts of Trade 243
The Bottom Line 245
Summary 245
Chapter 22
The Line between Legal and Illegal
Goods 248
An Economic Model of Tobacco, Alcohol,
and Illegal Goods and Services 249
Why Is Regulation Warranted? 249
The Information Problem 249
External Costs 250
Morality Issues 252
Taxes on Tobacco and Alcohol 253
Modeling Taxes 253
The Tobacco Settlement and Why Elasticity
Matters 254
Why Are Certain Goods and Services
Illegal? 254
The Impact of Decriminalization on the Market
for the Goods 254
The External Costs of Decriminalization 255
Summary 255
Chapter 23
Natural Resources, theEnvironment,
andClimateChange 258
Using Natural Resources 259
How Clean Is Clean Enough? 259
The Externalities Approach 260
When the Market Works for Everyone 260
When the Market Does Not Work for Everyone 260
The Property Rights Approach to the Environment
andNatural Resources 262
Why You Do Not Mess Up Your Own Property 262
Why You Do Mess Up Common Property 262
Natural Resources and the Importance
of Property Rights 262
Environmental Problems and Their Economic
Solutions 263
Environmental Problems 263
Economic Solutions: Using Taxes to Solve
EnvironmentalProblems 265
Economic Solutions: Using Property Rights
to Solve Environmental Problems 265
No Solution: When There Is No Government
to Tax or Regulate 267
Summary 268
Chapter 24
Health Care 271
Where the Money Goes and Where
It Comes From 271
Insurance in the United States 272
How Insurance Works 272
Varieties of Private Insurance 273
Public Insurance 273
Economic Models of Health Care 274
Why Health Care Is Not Just Another Good 274
Implications of Public Insurance 275
Efficiency Problems with Private Insurance 276
Major Changes to Insurance ResultingfromPPACA 277
The Blood and Organ Problem 279
Comparing the United States with the Rest
of the World 279
Summary 281
Chapter 25
Government-Provided Health Insurance:
Medicaid, Medicare, and the Childrens
Health Insurance Program 283
Medicaid: What, Who, and How Much 284
Why Medicaid Costs So Much 285
Why Spending Is Greater on the Elderly 286
Cost-Saving Measures in Medicaid 287
Medicare: Public Insurance andtheElderly 287
Why Private Insurance May Not Work 287
Why Medicares Costs Are High 288
Medicares Nuts and Bolts 289
Provider Types 289
Part A 289
Part B 290
Prescription Drug Coverage (Part D) 290
Cost Control Provisions in Medicare 291
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xiv Table of Contents
The Medicare Trust Fund 292
The Relationship between Medicaid and
Medicare 293
Childrens Health Insurance Program 293
Summary 294
Chapter 26
The Economics of Prescription Drugs 296
Profiteers or Benevolent Scientists? 297
Monopoly Power Applied to Drugs 297
Important Questions 299
Expensive Necessities or Relatively
Inexpensive Godsends? 299
Price Controls: Are They the Answer? 301
FDA Approval: Too Stringent or Too Lax? 301
Summary 302
Chapter 27
So You Want to Be a Lawyer: Economics
andthe Law 304
Private Property 304
Intellectual Property 305
Contracts 305
Enforcing Various Property Rights and Contracts 305
Negative Consequences of Private Property Rights 306
Bankruptcy 306
Civil Liability 306
Summary 308
Chapter 28
The Economics of Crime 310
Who Commits Crimes and Why 310
The Rational Criminal Model 311
Crime Falls When Legal Income Rises 311
Crime Falls When the Likelihood and Consequences
ofGetting Caught Rise 312
Problems with the Rationality Assumption 312
The Costs of Crime 312
How Much Does an Average Crime Cost? 313
How Much Crime Does an Average Criminal
Commit? 313
Optimal Spending on Crime Control 314
What Is the Optimal Amount to Spend? 314
Is the Money Spent in the Right Way? 315
Are the Right People in Jail? 315
What Laws Should We Rigorously Enforce? 315
What Is the Optimal Sentence? 316
Summary 317
Chapter 29
Antitrust 319
Whats Wrong with Monopoly? 319
High Prices, Low Output, and Deadweight
Loss 319
Reduced Innovation 320
Natural Monopolies and Necessary Monopolies 320
Natural Monopoly 320
Patents, Copyrights, and Other Necessary
Monopolies 321
Monopolies and the Law 322
The Sherman Anti-Trust Act 322
What Constitutes a Monopoly? 323
Examples of Antitrust Action 323
Standard Oil 323
IBM 324
Microsoft 324
Apple, Google, and the European Union 325
Summary 325
Chapter 30
The Economics of Race and Sex
Discrimination 327
The Economic Status of Women and Minorities 327
Women 327
Minorities 328
Definitions and Detection of Discrimination 330
Discrimination, Definitions, and the Law 330
Detecting and Measuring Discrimination 331
Discrimination in Labor, Consumption, and
Lending 332
Labor Market Discrimination 332
Consumption Market and Lending Market
Discrimination 333
Affirmative Action 334
The Economics of Affirmative Action 334
What Is Affirmative Action? 335
Gradations of Affirmative Action 335
Summary 336
Chapter 31
Income and Wealth Inequality:
WhatsFair? 339
Measurement of Inequality 339
Income Inequality 339
Wealth Inequality 342
The Shrinking Middle Class 343
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Table of Contents xv
Causes of Household Income andWealth Inequality 344
Costs and Benefits of Income Inequality 345
Summary 347
Chapter 32
Farm Policy 349
Farm Prices Since 1950 349
Corn and Gasoline 350
Price Variation as a Justification for Government
Intervention 351
The Case for Price Supports 351
The Case against Price Supports 352
Consumer and Producer Surplus Analysis
of Price Floors 352
One Floor in One Market 352
Variable Floors in Multiple Markets 353
What Would Happen without Price Supports? 353
Price Support Mechanisms and Their History 353
Price Support Mechanisms 353
History of Price Supports 355
Is There a Bubble on the Farm? 355
Kick It Up a Notch 356
Summary 356
Chapter 33
Minimum Wage 358
Traditional Economic Analysis of a Minimum
Wage 359
Labor Markets and Consumer and Producer Surplus 359
A Relevant versus an Irrelevant Minimum Wage 360
What Is Wrong with a Minimum Wage? 361
Real-World Implications of the Minimum Wage 361
Alternatives to the Minimum Wage 362
Rebuttals to the Traditional Analysis 362
The Macroeconomics Argument 362
The Work Effort Argument 363
The Elasticity Argument 363
Where Are Economists Now? 363
Kick It Up a Notch 364
Summary 364
Chapter 34
Ticket Brokers and Ticket Scalping 366
Defining Brokering and Scalping 367
An Economic Model of Ticket Sales 367
Marginal Cost 367
The Promoter as Monopolist 367
The Perfect Arena 368
Why Promoters Charge Less Than They Could 369
An Economic Model of Scalping 369
Legitimate Scalpers 370
Summary 371
Chapter 35
Rent Control 373
Rents in a Free Market 373
Reasons for Controlling Rents 374
Consequences of Rent Control 375
Why Does Rent Control Survive? 377
Summary 378
Chapter 36
The Economics of K12 Education 379
Investments in Human Capital 379
Present Value Analysis 380
External Benefits 380
Should We Spend More? 381
The Basic Data 381
Cautions about Quick Conclusions 383
Literature on Whether More Money Will Improve
Educational Outcomes 385
School Reform Issues 385
The Public School Monopoly 385
Merit Pay and Tenure 386
Private versus Public Education 386
School Vouchers 387
Collective Bargaining 387
Summary 388
Chapter 37
College and University Education:
Why Is It So Expensive? 390
Why Are the Costs So High? 390
Why Are College Costs Rising So Fast? 392
Why Have Textbook Costs RisenSo
Rapidly? 393
What a College Degree Is Worth 395
How Do People Pay for College? 396
Summary 398
Chapter 38
Poverty and Welfare 400
Measuring Poverty 400
The Poverty Line 401
Whos Poor? 401
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Poverty through History 402
Problems with Our Measure of Poverty 403
Poverty in the United States versus Europe 404
Programs for the Poor 404
In Kind versus In Cash 404
Why Spend $789 Billion on a $96 Billion
Problem? 406
Is $789 Billion Even a Lot Compared to
OtherCountries? 406
Incentives, Disincentives, Myths,
and Truths 406
Welfare Reform 407
Is There a Solution? 407
Welfare as We Now Know It 408
Is Poverty Necessarily Bad? 408
Summary 408
Chapter 39
Head Start 411
Head Start as an Investment 411
The Early Intervention Premise 411
Present Value Analysis 412
External Benefits 412
The Early Evidence 412
The Remaining Doubts 412
The Head Start Program 413
The Current Evidence 414
Evidence that Head Start Works 414
Evidence that Head Start Does Not Work 415
More Evidence Is Coming and Some Is In 415
The Opportunity Cost of Fully Funding
HeadStart 416
Summary 416
Chapter 40
Social Security 418
The Basics 418
The Beginning 418
Taxes 419
Benefits 419
Changes over Time 419
Why Do We Need Social Security? 420
Social Securitys Effect on the
Economy 421
Effect on Work 421
Effect on Saving 421
Whom Is the Program Good For? 422
Will the System Be There for Me? 424
Why Social Security Is in Trouble 424
The Social Security Trust Fund 424
Options for Fixing Social Security 425
Summary 426
Chapter 41
Personal Income Taxes 429
How Income Taxes Work 429
Issues in Income Taxation 434
Horizontal and Vertical Equity 434
Equity versus Simplicity 434
Incentives and the Tax Code 434
Do Taxes Alter Work Decisions? 435
Do Taxes Alter Savings Decisions? 435
Taxes for Social Engineering 435
Who Pays Income Taxes? 435
The Tax Debates of the Last Tw
