Microeconomic Policy

Microeconomic Policy

A New Perspective

Clem Tisdell and Keith Hartley

This thoroughly accessible textbook shows students how microeconomic theory can be used and applied to major issues of public policy. In this way, it will improve their understanding of both microeconomic theory and policy and also develop their ability to critically assess them. Clem Tisdell and Keith Hartley have expanded upon their previous successful work on microeconomics. As a result, this new book is considerably updated with substantial chapter revisions, as well as new chapters dealing with business management, ownership, environmental issues, public choice, defence, conflict and terrorism.

Chapter 6: Costs, Supply and Policy

Clem Tisdell and Keith Hartley

Subjects: economics and finance, industrial economics


INTRODUCTION AND OVERVIEW Every national policy decision or choice involving the use of resources requires a consideration of costs, usually in terms of opportunity costs. Opportunity costs are measured by the value of alternatives forgone as a result of choosing one possibility rather than alternative possibilities. The relevant cost of choosing one alternative from a set of possible choices is the value of the best alternative forgone. The purpose of this chapter is to explain and illustrate policy applications of the concept of opportunity costs, to consider other cost concepts such as sunk costs, which are important for policy purposes, and to examine cost and supply relationships typically experienced by firms and industries and consider their implications for microeconomic policy. The discussion deals first with the concept of opportunity costs and then illustrates how (private) opportunity costs are automatically taken into account by firms in a perfectly competitive market system. In some circumstances, this results in a Paretian optimum. But perfectly competitive markets can fail to achieve this result if marginal social opportunity costs diverge from the marginal private opportunity costs experienced by individual decision-makers (for example, firms), for instance as a result of environmental spillovers, as was illustrated in Chapter 2. This may call for government intervention in the operations of the economy. But as will be pointed out, governments and government bureaucrats may fail to take proper social account of marginal social opportunity costs. When government intervention is contemplated on the grounds of market failure, it is necessary...

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