RoR: Forum

Background
Paul Reiter's title was listed in the film as: Professor of Medical Entymology; Pasteur Institute

Here is the IMDB link to "Cool It":

http://www.imdb.com/title/tt1694015/

Another quote from the documentary is from Myron Ebell (Director of Energy and Global Warming; CEI):

There's a very broad consensus among big businesses that there is money to be made if the government will mandate policies that raise energy prices for consumers.

Ed

p.s. Another interesting tidbit from the film is that Enron was a leading lobbyist for the Kyoto Agreement

(Edited by Ed Thompson on 8/24, 8:44pm)

Post 1

Friday, August 26, 2011 - 11:43am

Another interesting tidbit from the film is that Enron was a leading lobbyist for the Kyoto Agreement

That doesn't surprise me. Many people want a free market for themselves, but not others. Also, Enron built and maintained power plants and related things, and the Kyoto Agreement would have made such building and maintenance more expensive, presumably boosting Enron's revenues and profits.

Post 2

Monday, August 29, 2011 - 9:14am

Merlin wrote,

Enron built and maintained power plants and related things, and the Kyoto Agreement would have made such building and maintenance more expensive, presumably boosting Enron's revenues and profits.

But how would making them more expensive boost Enron's revenues and profits? Wouldn't it be just the opposite? If they're more expensive to build and maintain, wouldn't this raise Enron's costs, cutting into their profits?

Post 3

Monday, August 29, 2011 - 9:32am

http://opinion.financialpost.com/2011/08/26/lawrence-solomon-science-now-settled/

Post 4

Monday, August 29, 2011 - 9:54am

But how would making them more expensive boost Enron's revenues and profits?

Enron could charge a client more (raise revenues) for doing additional work to comply with environmental laws or regulation. If added revenue were more than added cost, profits go up.

Wouldn't it be just the opposite? If they're more expensive to build and maintain, wouldn't this raise Enron's costs, cutting into their profits?

This seems�to assume revenue is fixed. That might apply to an existing power plant owner. However, Enron did more building for other owners than owning their own power plants. Regarding maintenance, it was revenue for Enron when somebody else, a client, was owner.

(Edited by Merlin Jetton on 8/29, 9:58am)

Post 5

Monday, August 29, 2011 - 12:00pm

I asked, "But how would making them more expensive boost Enron's revenues and profits?" Merlin replied,

Enron could charge a client more (raise revenues) for doing additional work to comply with environmental laws or regulation. If added revenue were more than added cost, profits go up.

If added revenues were more than added costs, sure profits would be higher, but why assume that? If Enron could get away with charging a client more than the added cost after costs went up, why couldn't it get away with charging the client that much more when costs were lower? There's no reason to assume that the demand for their products and services would be any higher after the increase in costs than before. It doesn't follow that just because costs are higher, their profits will therefore be higher. Quite the contrary. If costs are higher, other things being equal (and there's no reason to assume they're not), then their profits will be lower.

I wrote, "Wouldn't it be just the opposite? If they're more expensive to build and maintain, wouldn't this raise Enron's costs, cutting into their profits?"

This seems to assume revenue is fixed. That might apply to an existing power plant owner. However, Enron did more building for other owners than owning their own power plants. Regarding maintenance, it was revenue for Enron when somebody else, a client, was owner.

Again, if the client is willing to pay Enron more money due to the higher costs of complying with the government's regulations, why couldn't Enron have gotten the same revenue before the owner's costs increased? As far as the owner is concerned, it's the same out-of-pocket expenses either way.

Post 6

Monday, August 29, 2011 - 6:58pm

Bill,

Merlin said:

However, Enron did more building for other owners than owning their own power plants. Regarding maintenance, it was revenue for Enron when somebody else, a client, was owner.

To which you replied:

Again, if the client is willing to pay Enron more money due to the higher costs of complying with the government's regulations, why couldn't Enron have gotten the same revenue before the owner's costs increased? As far as the owner is concerned, it's the same out-of-pocket expenses either way.

Merlin may have his own answer to this, but if there are regulations for extra work to be performed, and if Enron is the one getting paid for the extra work to be performed, then Enron would be getting the extra money (profit) that comes from getting paid for that extra work.

Think of a simpler example:

Let's say that the government regulated yard work. A company that mows your lawn would have to comply with the regulations -- which now include tree-trimming, stump-removal, mulch-raking, and hand-watering after the grass is cut. That mowing company was getting paid, say, $100 to mow your lawn once a week, but now -- with the extra regulations -- it is getting paid $250 a week. The reason for the extra service work is the government regulation. Normally, you would not pay someone to hand-water your lawn after mowing it. You certainly weren't interested in paying someone to rake the mulch in your landscaping to a precisely-flat level (as codified in the regulations).

The mowing company would make windfall profits from this kind of regulation.

Ed

(Edited by Ed Thompson on 8/29, 6:59pm)

Post 7

Tuesday, August 30, 2011 - 12:24am

Ed you wrote,

Let's say that the government regulated yard work. A company that mows your lawn would have to comply with the regulations -- which now include tree-trimming, stump-removal, mulch-raking, and hand-watering after the grass is cut. That mowing company was getting paid, say, $100 to mow your lawn once a week, but now -- with the extra regulations -- it is getting paid $250 a week. The reason for the extra service work is the government regulation. Normally, you would not pay someone to hand-water your lawn after mowing it. You certainly weren't interested in paying someone to rake the mulch in your landscaping to a precisely-flat level (as codified in the regulations).

The mowing company would make windfall profits from this kind of regulation.

What if you didn't want to pay the extra money -- the $250 -- and wouldn't agree to have them do the job unless they agreed to do it for $100? Are you saying that the company that performed the work could force you to pay the $250, even if you wouldn't agree to the higher rate? And if you were willing to pay the higher rate for something that you didn't want done in the first place, then why wouldn't you have been willing to pay $250 to have your lawn mowed, if that's what the company charged?

Post 8

Tuesday, August 30, 2011 - 12:33am

Bill,

I think that what Ed is saying is that regulations benefit some companies who are able to pass on higher costs to their customers while their competitors don't all have the ability to pay those costs, much less pass them on. Sufficiently complex EPA/Environmental/safety/labor laws on law care will kick the small companies out of the market - they can't afford the lawyers or the special equipment or the clerical staff.

This big companies reduce competition which should result in some combination of increased market share and/or increased margin.

Think of those girls who were stopped from selling lemonade in their front yard because they didn't have a $300 permit. Same thing.

Post 9

Tuesday, August 30, 2011 - 10:09am

Bill,

What if you didn't want to pay the extra money -- the $250 -- and wouldn't agree to have them do the job unless they agreed to do it for $100?

The regulations state that all work on yards has to be a certain way. This will create a new market for yard work -- work that is always more extensive than in the past. So, when you say that you want the extra work done for the same money, you being a little facetious. It's true that there will be new agreements reached (between customers and providers), but the field of providers will be smaller and the opportunity for profit will be more extensive.

Like Steve said, if you are an established company in this market, you will be able to adapt to the regulations, but entry into the field will be hampered -- leading to a de facto monopoly.

The same thing happens with drug companies. The FDA requires (of companies) $10+ million dollars to bring a new drug to market. This raises the bar for entry into the field of drug making. And, while that bar is raised, prices can be "inflated" beyond what they would reach under free competition.

Ed

Post 10

Tuesday, August 30, 2011 - 10:35am

Steve, you wrote,

I think that what Ed is saying is that regulations benefit some companies who are able to pass on higher costs to their customers while their competitors don't all have the ability to pay those costs, much less pass them on.

Forgive me, Steve, but I'm having trouble following the logic of your argument. You say that some companies can pass on the higher costs to their customers, but then you say that their competitors cannot pass them on. Why not? If some companies can pass them on, why can't all companies? What am I missing?

Post 11

Tuesday, August 30, 2011 - 11:53am

Bill,

You wrote, "Forgive me, Steve, but I'm having trouble following the logic of your argument."

No apology is needed, Bill. It's my pleasure to be able to enlighten a professor of Economics. :-)

Focus on the statement where I explained that some competitors can't afford the compliance costs imposed by regulations - the businesses aren't large enough.

This relates, I believe, to an effect of fixed versus variable costs at different output levels, right? For example, if those two little girls who wanted to sell lemonade in their front yard can't come up with $300 for the business permit, they are out of business, and then there is no cost to pass on. Whereas Tropicana would have no problem paying for business permits and has the sales volume needed to ensure that compliance cost can be passed on without the risk of setting their prices above what the market will bear.

Regulations favor the larger business and can act as a barrier to entry into the market for new businesses.
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p.s., The picture is from an article where the children were fined $500 by a Montgomery County, Maryland inspector for operation of a business without a license. The fine was later dropped but we are now safe from the dangers posed by these unregulated, rapacious profit mongers. And it certainly isn't our fault that these greed capitalists couldn't find enough loose change behind the sofa cushions to hire the clerical and legal staff needed to deal with things like health codes, tax law, labor law requirements, and various local, state and national regulations.

Post 12

Tuesday, August 30, 2011 - 1:44pm

Steve,

The company couldn't borrow the money for the business permit, produce and sell the product and pass on the costs?

How successfully they could pass them on would depend, of course, on the elasticities of demand and supply. The more inelastic the demand for the product (relative to that of supply), the more the extra costs could be passed on to the consumer, because with an inelastic demand, the percentage decrease in the quantity demanded would be less than the percentage increase in the price, leading to more revenue and profit.

For example, suppose that I'm selling 100 cups of lemonade a day for $1.00 a cup. My total sales revenue is $100. Now suppose I raise my price 10% to account for the new regulations (requiring every cup to have a cover). As a result the demand for lemonade falls by 5%. So I'm now selling 95 cups of lemonade for $1.10. What is my total revenue? Its now $104.50. -- up from $100. I'm doing better. (So why didn't I raise my price 10% before the new regulations took effect?)

On the other hand, if the demand for lemonade (relative to that of supply) were elastic -- i.e., if the percentage decrease in the quantity demanded were greater than the percentage increase in the price -- the company would have to bear a larger portion of the extra cost than it could pass on to the customer, in which case, its sales revenue and profit margin would be smaller.

For example, suppose once again that I'm selling 100 cups of lemonade a day for $1.00 a cup, for a total sales revenue of $100, and that I raise my price 10% to account for the new regulations, but this time the demand for lemonade falls by 15%. Since I'm now selling only 85 cups of lemonade for $1.10, what is my total revenue? Its $93.50. -- down from $100. I'm doing worse than before.

So whether a company would benefit from the new regulations in passing on the costs to consumers depends on the relative elasticities of demand and supply.

Post 13

Tuesday, August 30, 2011 - 2:07pm

Bill,

So you are saying that a given regulation will fall as an equal burden on the girls' lemonade stand as it would on the Tropicana corporation?

That's your position?

You believe that regulations are never a barrier to entry for new businesses?
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You end your post by writing, "So whether a company would benefit from the new regulations in passing on the costs to consumers depends on the relative elasticities of demand and supply.

Why would regulations that force the raising prices EVER be described as a "benefit"? (Unless it harms competition more than it harms your business.)

Your discussion doesn't address the comparison of the effects of a regulatory burden on a small, upstart competitor, versus the effects on a very large established firm. (Did you just want to talk on Elasticity of Demand?)

I don't know how to make my comparison more obvious than the real life story behind the photo and example of a lemonade 'company' driven out of business by regulations and the comparison to Tropicana, the huge multinational corporation that would has no problem with a $300 dollar business permits.

Post 14

Tuesday, August 30, 2011 - 7:09pm

Another example would be the giant media corporations which fall over each other in order to promote the latest from Michael Moore (who promotes heavy regulation and the penalizing of really big industries, such as them).

Ed

Post 15

Wednesday, August 31, 2011 - 12:24pm