SECTION VIII: THE LABOR MARKET p. 165

Profit Maximizadon in Labor Markets

Competitive Labor Markets

Relative Wages and Exploitation

Income Differentials

Affirmative Action

International Income Comparisons

Imperfect Labor Markets

Monopsony Marginal Factor Cost

Monopsony Equilibrium

Labor Unions

Bilateral Monopoly

The Power of Unions over Wages

The Demand for Other Factors of Production

Algebraic Relations

Questions

SECTION IX MARKET TAILURE p. 193

Public Goods

Common Property Resources ExternaUties

Standards and Pollution Taxes

Measuring Efficiency Loss

The Coase Theorem

Internalizing the Externalities

Standards and Pollution Taxes

The Theory and Role of Government

Questions

Review Quesdons for Sections Vl-IX

SECTION I: EXCHANGE

ie size of the American economy is truly , In 1994, there were nearly 17 million sepa-ess organizations buying and selling about pn dollars worth of goods and services to I million people living in eighty million dif-useholds. Although one might at first think iination of such an enormously complex Tactivity would require a vast and omniscient (agency, no government organization decides resources will be devoted to production; no ?nt office decides which goods will be provid-iich will not; and no government planner bo shall receive each good. On the contrary, oeiican economy intervention by the govcm-: and planning decisions often means the I rather than the ordering of economic activity.

¥low then is the economy ordered? In the aoney prices constitute the control mechanisms : the American economic colossus possible; ernments chief tasks are to provide defense,

"of money, and enforce contracts, loncy prices represent rales of exchange and nsipned in dollars per unit Although we usu- prices in terms of money, the dollar price

is only one possible measure. We could, in fact, use other physical measures such as hamburgers per haircut or cookies per can For example, if the price of a hamburger is $1.50 and that of a bicycle is $150.00, then I can trade one bicycle for 100 hamburgers or 100 hamburgers for a bicycle. In other words, money prices express the rate at which one good can be exchanged for another.

The direct trade of one good for another, termed barter, almost never transpires in developed economies except to hide the transaction from taxar tion. The reason is that trade via barter is more difficult than trade with money. For example, suppose you grow berries that you want to trade for some nuts. To acquire nuts in a barter economy, you must find a person who not only has nuts, but who also wants berries. In other words, trade will not transpire unless a double coincidence of wants occurs; each party must want what the other has to offer or trade cannot transpire.

Of course, it would consume a lot of resources to establish a double coincidence of wants, come to terms, and trade via barter. To an economist all such acdvides are considered costs. But while everything foregone in making a trade represents a cost, transactions costs are those costs which are not received as a benefit to the trading partner. Searching for a trading partner is an example; the ume spent searching for a

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partner, unlike the money you pay when you fmd one, is not received by him as a benefit. Its thus a part of your transacdons cost. Naturally, trading with money reduces the pardes transacdons costs because they neednt search for a double coincidence of wants. In the berry example, you can sell your berries for money and use the money to buy nuts even if the nut seller despises berries. While real world transacdons costs are rarely, if ever, zero, modern economies have developed insutudons and specialized traders which tend to rmnimize these costs.

MIDDLEMEN

One such insdtudon is that of middlemen. Middlemen are specialists in reducing transacdons costs so that trade can transpire. For example, if you want to eat an apple as you read this, you could find a farmer selling apples and buy direcdy from him. You do not do so because its less cosdy in terms of everything you forego, not just money, to purchase the apple fi-om a grocer, a middleman. Moreover, the grocer himself may buy his apples from sdll another middlemen, his wholesaler. The grocer does so not because hes anxious to pay his wholesaler, but because trading via wholesalers is cheaper and easier for him, i.e., less cosdy than trading directly with the farmer The point is that middlemen can survive in a market if and only if trading with middlemen is less cosdy than trading without them. Moreover, to the extent that the middlemans fee exceeds the costs of his operation, opportunities exist for other middlemen to enter the market and undercut his terms. Viewed thb way, it can easily be seen that middlemen never compete with their ultimate customers, only with other middlemen. The reason is simple: No buyer would ever knowingly trade via middlemen if doing so wasnt at least as good as the alternative. Instead, the process of middlemen competing with other middlemen for buyers* favor usually continues until the best possible terms of trade emerge.

SPECIALIZATION

Institutions such as money and middlemen are associated with specialization in production, another prominent feature of developed economies. For example, few people know how to perform more than a few productive tasks and most hold only a few jobs over the course of their enure lives. Most workers specialize because specialization increases their productivity. For instance, it woidd be extremely difficidt for any one worVer to manufacture an entire car fi-om scratch. The number of skills that need be mastered - mining,

smelting, metallurgy, assembly, etc. - is far too large. Instead, autos are produced on assembly lines and each worker learns how to do only a few parts of the total job. Since each worker need learn only a few tasks, valuable time is liberated for actual car production, allowing more cars to be produced. On the other hand, repetitive work is often enormously dehumanizing. Why then do workers accept it? Apparendy they prefer the overall package of greater income, albeit with job monotony, to that of reduced income and greater job variety. Otherwise, they would accept lower pay in exchange for more varied work.

COOPERATION

All trade is essentially cooperative: one sells what others wish to buy and consume in order to finance ones own consumption. Nobody will be able I to specialize and, therefore, to consume much himself j unless he can interest a buyer in what he has to sell. ] Self interest therefore induces the seller to endeavor ] to please the buyer. In other words, buyers and sellers 1 trade with each other in an attempt to make them-j selves better off, and as a result, trade is mutually j advantageous. But neither party will be able to benefit] himself unless he likewise benefits his trading partner. Why? Because the other would simply refuse to trade.

Trade does not transpire because one trader! has a "surplus" of some good. First of all what is a sur-1 plus? Does it mean that the traded good is utterly val-j ueless to the trader? If so, why do so many traders put! in so much time and effort to produce the "surplus?"! Still less can a surplus mean everything above and! beyond ones "need". Needs are an even more nebthl lous concept For instance, if you need a certain! amount of good X, will you throw away one speckj more? Will you die ifyou have one speck less? Willyoul refuse to trade any of your needed good for any] amount of something else?

The word need properly belongs in rhetoricl when you want to express your desires forcefully, ifj imprecisely. You may want to tell your legislator thatj you need more support to attend college, you mayl want to tell your parents that you need money to buy! this book, but do not confuse needs with wants. Onlyj the latter has any place in economics.

Equally common but no more precise arc! expressions like Kinder works for Pacific Gas & Electric This statement is innocuous enough when it j just means that Kinder is employed by PG&E, but! were sure it never means what it literally says. In reality,! Kinder is working for herself, not PG&E. We can be j sure of that because as soon as PG&E fails to givcj