EBF 200
Introduction to Energy and Earth Sciences Economics

 

Summary and Final Tasks

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In this lesson, we studied the behavior of firms with respect to obtaining favors from government agencies. Such favors can be in the form of contracts, regulations, price controls and import restrictions. The act of competing with other firms for these favors is called rent-seeking, as it is an attempt to obtain "unearned" economic profits. This behavior persists because of the idea of concentrated benefits and distributed costs - such behaviors can reap huge profits for the firms that are successful, and the costs are spread out over large swaths of the public who do not often have a rational basis for combating them because the cost of fighting is greater than the benefits obtained by an individual.

We then examined two types of government intervention: the setting of price floors and price ceilings. We showed that these attempts to modify the price that would be observed in a competitive market actually end up hurting the people they are intended to help: price caps cause shortages, and to obtain the goods in question, consumers have to compete with each other in non-price ways, such that the "real" cost ends up being higher than it would be in an uncontrolled market. The same is true of price floors, which lead to gluts, and force suppliers to compete with each other in non-price ways, often costing them more than the extra cash they are earning.

In the next lesson, we will start looking at some topical issues in energy and mineral economics, such as resource scarcity, climate change and energy security.

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