pointrider said:
Hi Econ101!
Two questions, please.
You stated, "deadweight loss is that loss of economic activity that a certain action creates." Maybe it's a matter of semantics, but my understanding is that deadweight loss is a reduction of net economic benefits resulting from an inefficient allocation of resources.
If you will humor me on that,
1. what constitutes an inefficient allocation of resources, and
2. what exactly is a reduction of net economic benefits?
Thank you!
Pointman, you are right about deadweight losses. I wish I could easily show you the graphical representation of losses, to the producers and or the merchants, and or the consumer surplus but I don't think I know how to get the graph on this forum. You will have to find them under monoposonies on the net. They are well known however. Traditionally deadweight losses are thought of by the graphical representations of monopolies (if there is just one seller, like your electric utility) or oligopolies (where there are just a few sellers). These usually graph the loss of consumer surplus and the deadweight loss to the economy. In graphing monopsonies (one buyer) or oligopsonies (several buyers), there are the same type of losses but they are losses to the producer surplus (the piece of the pie the farmer gets) and deadweight losses. Just because the losses are not consumer losses does not mean that the society is better off. There is a deadweight loss where the increase to consumer surplus (buyer surplus) is offset by the loss to producer surplus.
In other words, the gains to buyers by the exercise of monopsony power, even if all given to the consumers, creates a deadweight loss to society.
Question: Does taxing all producers and giving all that tax money to consumers create deadweight losses? Of course it does. That is why there is a law against it. In the Tyson case, taxing all cattle producers eventually causes the price to go up. When the price goes up Tyson's argument is that if all of the taxes are given to consumers then there is no harm done. This is a lie. This does create a deadweight loss. This also belies the fact that they really made out in the chicken side of their business when prices of beef went up. The market structure in chicken is one where the increases in price go directly into the pockets of Tyson. Thus, they have a reason to swing the cattle markets when they claimed they had no reason to swing them. They have clever arguments that are just wrong. I call this justification of stealing the robin hood argument. If they take from the cattle farmers and give what they took to the consumer, it creates deadweight losses and they do it to make more money in poultry and pork.
Whenever there is market power exerted on markets, there is an inefficient allocation of resources. Prices should be set by supply/demand, not all of the things outlawed in Section 202. It should be noted that many of the "unfair" things they do are an attempt to change market participant's (seller) behavior in their favor. For instance, it would be unfair to give preferential treatment to some sellers if those preferential treatments put others at a disadvantage. The thing Tyson tries to do is to put some business justification in the mix so that it is hard to tell if the business justification outweighed the harm. Any time a monopsonist claims efficiencies of another as a justification for its actions you better wath out. That would be a possible sign of the abuse of market power. That was the case in the Pickett case.