Harberger Triangle Research Articles

Variables of the Harberger Triangle in the Financial Market

Variables of the Harberger Triangle in the Financial Market

Collusion and price-fixing of drugs in Mexico: The case of metformin (2008-2018)

Objective. This study aims to analyze the collusion of pharmaceutical companies that hinders competition in the pharmaceutical market and if this phenomenon leads to an increase in overpricing in government drug purchases and a decrease in social welfare. Design and setting. A descriptive analysis was carried out based on drug purchase data by the Mexican Social Security Institute (MSSI) to the leading companies in the pharmaceutical sector, and a well-being changes analysis was carried out using the Harberger triangle method. Results. The data shows that a consortium of drug suppliers sold metformin at a premium to one of the prominent public health institutes in the country. Furthermore, there was a highly significant decrease in well-being indices. Conclusion. Industry executives and government officials were acting during that period as a cartel, colluding to set high prices during 2008-2018. Collusion hinders competition between companies; consequently, the consumer does not always have access to the lowest available drug price.

Assessment of the Deadweight Loss Arising from the Imperfect Competition in the Banking Market

Financial market failures lead to deadweight (welfare) loss for society. Assessment of the deadweight loss started with the so-called Harberger Triangles, where Harberger offered a clear and persuasive derivation of the triangle method of analysing the deadweight loss and applied the method to estimate deadweight losses due to income taxes in the United States. Hertog further put the deadweight loss into the model with government intervention to assess the optimal level of welfare loss control. This concept is central to regulatory economics. Harberger’s approach is based on the deviation of market equilibrium measured in terms of price and quantity. When analysing imperfect competition as one of the market failures, authors have identified in the literature variables for “price” and “quantity”. The research presents the approach how calculating the deadweight loss arising from the imperfect competition using the following variables: “price” – interest rates (loans), “quantity” – exposure of loans on banks’ balance sheets. The outcome of the research is integral for the assessment of the deadweight loss arising from imperfect competition. Deadweight loss calculations for selected countries show results corresponding to the expectation to be lower than 12% - the maximum value is 4,6% for Latvia, which experienced the most significant increase in the banking market concentration from the sample. Research methods used: literature analysis, regression analysis, and mathematical analysis tools (integrals).

Assessment of the Deadweight Loss Arising from the Information Asymmetry in The Banking Market

Market failures lead to the deadweight (welfare) loss for the society. Assessment of the deadweight loss started with so called the Harberger Triangles, where Harberger offered a clear and persuasive derivation of the triangle method of analyzing the deadweight loss and applied the method to estimate deadweight losses due to income taxes in the United States. Harberger’s approach is based on the deviation of market equilibrium measured in terms of price and quantity. When analyzing the information asymmetry as one of the market failures authors have identified in the literature variables for “price” and “quantity”. Research hypothesis is that there is the deadweight loss arising from the information asymmetry in euro area. Research then presents the approach how to calculate the deadweight loss arising from the information asymmetry using the following variables: “price” – interest rates (loans). quantity” – exposure of loans on banks’ balance sheets. Research methods used: literature analysis, regression analysis, mathematical analysis tools (integrals).

Estimating the welfare loss due to vehicle tariffs in Malaysia

The Malaysian Government initiated domestic automobile production in 1985, paired with hefty tariffs on imported vehicles to protect the growing industry, using the infant industry argument as underlying. To gain empirical knowledge on the effectiveness of the infant industry argument for the automobile industry, the cases of Japan, South Korea and Spain are briefly analysed. The findings suggest that the Malaysian Government has failed to implement the infant industry type policies successfully. Additionally, the welfare cost of protecting the Malaysian vehicle industry is calculated using a Harberger triangle welfare loss analysis. The welfare loss is estimated for the year 2017 at MYR 11.3 b (US$2.8 b). It is suggested that the benefits of keeping the protectionist measures are too small to justify the costs. To close the article, policy recommendations are presented to reduce the welfare loss by gradually opening the sector up to international competition.

Why hasn’t the impact of the trade war been greater?

Abstract The macroeconomic effects of U.S. tariffs and foreign retaliation have been surprisingly small to date. Does this mean that the macroeconomic effects of the collapse of the global trading system would also be limited? I consider different perspectives on this limited macroeconomic fallout, including (i) that it takes a lot of Harberger Triangles to fill an Okun's gap; (ii) that the macroeconomic fallout is coming but has yet to materialize; and (ii) that the largest effects operate through the impact on global geopolitics and cooperation (or lack thereof).

The welfare costs of price controls and rent seeking in a class experiment

There are two efficiency effects of price controls: an “output effect” measured by the standard welfare loss triangles, and an “imperfect selection effect” that arises when controls prevent price from excluding high-cost sellers or low-value buyers. Although not discussed in most textbooks, the imperfect selection effect can be as large as the standard Harberger triangle welfare loss in symmetric designs, as confirmed by a class experiment described in this paper. The experiment also permits an analysis of the ways random non-price allocations shift the relevant supply function, and the related effects of rent-seeking competition that can arise with price controls.

The Emergence of the Tullock-Contest

The objective of the present paper is to show the historical or rather chronological development of the Tullock contest. It aims at showing the connections between the ’deadweight loss (DWL) triangles’, which were extended to what is now known as ’Harberger triangles’ (Harberger 1954; Wellford 2009), the concept of ’rent-seeking’ (Tullock 1967, 1997; Krueger 1974), and the ’Tullock contest’ (Tullock 1975, 1980; Tullock and Lockard 2001) itself. Looking at many relevant papers that have been published in this context, one will recognise the historical events that motivated Tullock to come up with the initial game, even though he himself said that he accidentally stumbled over many implications of the game. The motivations behind the Tullock contest are not only interesting from a ’nerdy’ or historical point of view but they can also facilitate the understanding of the underlying problems that are being investigated and the respective solutions that are being offered by Tullock and other researchers today.

Tax optimization in an agent-based model of real-time spectrum secondary market

The wireless communication industry is an essential sector boosting economic progress worldwide. The structure of the legacy wireless communication market, characterised by static licensing schemes, is moving towards real-time secondary spectrum markets. While the technological body of spectrum trading has been discussed in detail, from an economic perspectives there are still a lot of gaps in understanding how these transactions affect the economy of future communication standards. A challenging aspect of the real-time spectrum market deployment is the implementation of the appropriate tax system that impacts the market structure. With regards to this, we aim to build an agent-based model of the real-time secondary spectrum market in which various taxes including value-added tax, corporate tax, consumption tax and fixed tax, are employed. The relations between selected tax type rates and the hypothetical revenue of the national regulator is established using Laffer curves. The results of the analysis confirm the existence of a tax distortion, i.e. a system deviation from the efficient system functioning affected by the tax introduction. To measure the complexity of the tax strategies and the emergent tax distortion, an original approach based on Euclidean metrics defined over a vector space of the system performance indicators was proposed. This approach was later applied in parallel with the traditional Harberger's triangle methodology. We found that the constrained optimisation with the tax distortion restrictions provide satisfactory results regarding the stability of the tax distortion measure. Therefore, we propose the application of the most effective corporate tax optimisation complemented by selected additional tax types.

How Many Harberger Triangles Does it Take to Fill One Okun Gap?

How Many Harberger Triangles Does it Take to Fill One Okun Gap?

The welfare costs of rent-seeking: a methodologically individualist and subjectivist revision

Gordon Tullock is acknowledged for being the first to recognize the true costs of rent-seeking as including not only the Harberger triangle but also the Tullock rectangle. This rectangle does not constitute merely a lossless transfer of wealth, but it causes a misallocation of resources as rent-seekers invest resources in lobbying. However, a close reading of Tullock’s writings shows that his arguments are formulated in a holistic fashion, speaking of what is efficient or inefficient for society. Rent-seeking is inefficient because it reduces societal welfare. But according to a methodologically individualist and subjectivist economics, such a claim is invalid. We must distinguish between positive economic fact and normative moral philosophy. We call for a reconstruction of utility and welfare economics based on methodological individualism and subjectivism with implications for the theories of monopoly and competition: practices which Neoclassical perfect-competition theory considers to be evidence of rent-seeking should instead be deemed as indications of genuine competition Political economy should be concerned with ascertaining which institutions will best enable individuals to pursue their individually subjective ends – or else economists should be explicit about their normative preferences and political philosophies.

Disproving the Harberger Triangle

This paper works out the complete estimate of tax burden, or welfare loss of monopoly. In contrast, the Harberger triangle is truly miserably small. This paper also illustrates that the tax burden can be expounded either in a supply graph or in a demand graph. There is a corresponding profit calculation from the demand curve. Then, the misunderstanding of consumer’s surplus is clarified.

Pre‐Existing Distortions, Inter‐Industry Rent Seeking and the Welfare Cost of Policies Subject to Influence

It is well known that when there are existing distortions in related markets, partial equilibrium estimates of the welfare costs of new distortions using the standard “Harberger triangle” may be misleading (Goulder & Williams, ). We show that similar general equilibrium considerations also play an important role in the development of accurate estimates of the costs of rent seeking. Producers in other markets will have an incentive to engage in additional rent‐seeking activity to suppress or encourage the establishment of new distortions in hitherto undistorted markets. In these situations, the total amount of resources spent on trying to encourage or discourage a new distortion or increasing an existing distortion can exceed the sum of the partial equilibrium Harberger () “triangle” and Tullock () “rectangle.” The analysis and results contrast sharply with standard general equilibrium measures of the welfare costs of distortions and the general theory of second best, which hold that introducing a new distortion or increasing an existing distortion may, in some instances, be welfare improving.

A neo-institutionalism of measurement, without measurement: A comment on Douglas Allen’s The Institutional Revolution

In his elegant book Douglas Allen claims that an improvement in the measurement of Nature made for lower transaction costs and the Industrial Revolution. His argument is a typical example of neo-institutionalism in the style of Douglass North (1990) and North et al. (2009). A fall in a wedge of inefficiency is supposed to provide Good Incentives, and the modern world. But the elimination of wedges lead merely to Harberger Triangles of improved efficiency—not to the factor of 100 in properly measured real income per head, which is the Great Enrichment 1800 to the present to be explained. Allen does yeoman work in explaining some of the peculiarities of British public administration, such as the reliance on aristocratic honor and on the prize system in naval warfare. But he attributes to public administration an implausible effect on private incomes. The merging of power and plenty is mistaken. Further, the alleged increase in a modern ability to measure marginal products is implausible. Large modern enterprises face greater, not smaller, problems of assessing the contribution of individuals. Allen’s book on measurement does not measure, and the probable order of magnitude of the items he focuses on is too small to explain any but the details of administration.

Bank Concentration And Economic Costs Of Deposit Mobilization And Credit Extension In Ghana

Welfare losses due to misallocation of resources in the deposit and loans markets and inefficiency costs in both markets resulting from the concentration of the Ghanaian banking industry are estimated, respectively using the Harberger's triangle and deviations from cost efficient stochastic frontier approaches. Corporate governance variables hypothesized in the literature to be correlated with bank inefficiencies were also investigated. Estimates suggest that net welfare loss over 2001 - 2008 averaged 2.6% of gross domestic product (GDP) per year, while inefficiency costs averaged only 0.7% of GDP. Bank concentration is positively correlated with efficiency in both deposits and loans markets. The elasticity of operating costs with respect to deposits exceeds the elasticity with respect to loans. We recommend that steps be taken to reduce bank concentration as the resultant narrowing of interest rate spreads will likely yield welfare gains that exceed efficiency gains realizable from increased concentration.

THE EMPIRICAL MEASUREMENT OF RENT-SEEKING COSTS

This survey focuses on the efforts, carried out mainly by public choice scholars, to measure the social cost of rent seeking. The concept, introduced by Gordon Tullock in 1967 and coined by Anne Krueger in 1974, is well known and accepted by the profession, but its empirical measurement has fallen behind with respect to its theoretical formulation, an often criticized lack in the literature. Although there are good general surveys, none has specifically focused on reviewing the empirical efforts made to measure the phenomenon. The purpose of this paper is to provide such a survey. It could be said that the rent-seeking concept has been fully integrated into economic jargon. It is commonly used when some agent seeks to obtain an artificial transfer, usually from government, and covers all the actions, efforts or expenses that the agent has to carry out to obtain the prize. The key issue, however, is the possible social waste that arises in these situations. The empirical efforts to measure such waste constitute the main purpose of this survey. The concept of rent seeking was introduced by Tullock (1967), although the term was first coined by Krueger (1974) in a paper not related to the former. In a recent paper, Tullock himself wrote of the history of the concept and the intellectual context within which it arose (Tullock, 2003). Starting with the pioneering work by Harberger (1954), several studies were conducted during the 1950s in which the calculation of the social cost of monopolies and tariffs always gave the result of very modest figures. The first response to these results was made by Leibenstein (1966) and his 'X-efficiency', which refers to a hypothetical loss in efficiency due to the absence of competition. Shortly after Leibenstein's paper appeared, Tullock argued that the deadweight costs of monopoly and tariffs understate the true social cost because the expenditures made to capture related rents have to be included; so rectangles as well as Harberger's triangles have to be included in the calculations. Let us see this argument once more. Figure 1 depicts the iconic Tullock graphic analysis of rent seeking. It represents the demand schedule (D) for a monopolized good, where Pm is the monopoly

Coyote ugly: the deadweight cost of rent seeking for immigration policy

Many studies use a Harberger triangle method to estimate the immigration surplus to the native born population and conclude that the benefit of immigration is very small in proportion to the size of the US economy and thus the United States does not to stand to lose much if immigration is further restricted. This calculation neglects the rent seeking costs that the US economy bears when immigration policy is politically determined. This study estimates the rent seeking losses that the US economy could suffer if immigration policy were reformed to further close the borders.

The gains from improved market efficiency: trade before and after the transatlantic telegraph

This article looks at the gains from improved market efficiency in long-distance grain trade in the second half of the nineteenth century, when violations of the law of one price were reduced due to improved information transmission. Two markets, a major export centre, Chicago, and a major importer, Liverpool, are analysed. We show that the law of one price equilibrium was an ‘attractor equilibrium’. The implication is that prices converged to that equilibrium in a tâtonnement process. Because of asymmetrically timed information between markets separated by long distances there were periods of excess demand as well as excess supply, which triggered off the tâtonnement process. Over time, adjustments to equilibrium, as measured by the half-life of a shock, became faster and violations of the law of one price become smaller. There were significant gains from improved market efficiency, which took place after the information ‘regime’ shifted from pre-telegraphic communication to a regime with swift transmission of information in an era that saw the development of a sophisticated commercial press and telegraphic communication. This article is the first attempt to actually measure the gains from improved market efficiency and it demonstrates that improved market efficiency probably stimulated trade more than falling transatlantic transport costs. Deadweight losses decline significantly as markets became more efficient. The conventional view that Harberger triangles are almost always insignificant is challenged.

Targeting Teaching: The Welfare Costs of Market Restrictions

In most introductory and intermediate microeconomics textbooks, the measurable welfare effects of price controls, quantitative restrictions, and market restrictions more generally, are depicted as a Harberger triangle. This depiction understates these restrictions' inefficiency costs because it captures only the “top‐down” distortion caused by the wedge these restrictions drive between market‐wide quantity demanded and quantity supplied. It ignores the “bottom‐up” distortions caused by allocative inefficiencies on the constrained side of the market. In this article we describe a simple graphical exposition of these bottom‐up distortions. We argue that this graph can provide students with a picture of both the top‐down and bottom‐up inefficiencies. Moreover, it can be used for simple back‐of‐the‐envelope estimates of the magnitudes of the two inefficiencies.

UNEMPLOYMENT AND OTHER MEASURES OF LABOR MARKET INEFFICIENCY: A COMPARISON OF U.K. AND U.S. LABOR MARKETS 1931-96

Unemployment is probably the most widely feared phenomenon of our times ... (It) represents an enormous waste of human resources, reflects an important degree of inefficiency in economic systems, and causes a disturbing degree of social distress. (Organisation for Economic Co-operation and Development [OECD], 1994, pp. 4, 6) I. INTRODUCTION Unemployment is undoubtedly one of the most researched areas of economics. Determinants of the number of unemployed and duration of unemployment, the role of unemployment on the depreciation of human capital and on general life satisfaction, the interrelationship of unemployment and inflation and unemployment and output (Okun's law), and policies to reduce or even eliminate unemployment are just a few of the areas of research on unemployment. The underlying assumption in many studies on unemployment is that there is a very close correspondence between unemployment and labor market inefficiency as witnessed in the quote by the OECD just given. Although rarely if ever stated, there is also the assumption that a given unemployment rate indicates similar levels of inefficiency either across time and/or regions or countries. Unfortunately and somewhat surprisingly, this assumption has not been tested thus far. (1) Given the importance of comparisons of unemployment on the direction of macroeconomic policy of governments, it is very important to determine whether unemployment is indeed a good proxy for labor market inefficiency. The goal of the article, therefore, is to examine this issue. Thus we pose the following key questions: (1) To what degree do unemployment rates reflect labor market efficiencies? (2) If the goal is to measure relative labor market inefficiency, is it meaningful to compare unemployment rates over time? and (3) To what degree do differences in unemployment rates across countries reflect differences in labor market inefficiencies? Basic economic theory shows that inefficiency in any market depends not only on the wedge between supply and demand but also on the elasticities of demand and supply. The calculation of so-called Harberger triangles (Harberger 1954) of deadweight loss (DWL), which has a long history in the industrial organization and public finance literatures, indicates that for a given wedge between supply and demand, the DWL can be very different depending on the elasticities of supply and demand. Interestingly, however, studies examining the costs of unemployment do not focus on this basic view of welfare loss. Studies such as Gordon (1973), Ahsenfelter (1980), Hurd (1980), Clark and Oswald (1994), Murphy and Topel (1997), and Leslie and Blackaby (1999), among others, examine the costs of unemployment from an individual perspective but do not measure inefficiency from a market perspective, which is the focus of the Harberger triangles. Except for a publication by Fortin and Bernier (1988), (2) we know of no other application of calculating Harberger triangles to determine the level of inefficiency in the labor market. Therefore, this article uses labor market data from 1931 to 1996 in the United States and United Kingdom to calculate the DWL of unemployment and then compares the estimates of DWL to the unemployment rate to determine how closely related inefficiency and unemployment are. (3) The following section investigates the theoretical relationships between unemployment, labor supply and demand elasticities, and DWL. From this discussion we propose two alternative measures of inefficiency. The first is the Unemployment Loss Index, DWL divided by gross domestic product (GDP), which indicates how large labor market inefficiency is relative to total output in the economy. The second measure is DWL per unemployed person, a measure of the potential average gains to employing an unemployed individual. Section III outlines the data and methodology used to estimate the elasticities of labor supply and labor demand over time in the United States and United Kingdom, allowing for changes in the elasticities over time. …