THIRTEENTH EDITION ◆ MICHAEL PARKIN University of Western Ontario

New York, NY

A01_PARK4476_13_SE_FM.indd 5 11/1/17 12:42 PM Vice President, Business, Economics, and UK Courseware: Design Lead: Kathryn Foot Donna Battista Manager, Learning Tools: Brian Surette Director of Portfolio Management: Adrienne D’Ambrosio Content Developer, Learning Tools: Sarah Peterson Portfolio Manager: Ashley Bryan Managing Producer, Digital Studio and GLP, Media Editorial Assistant: Nicole Nedwidek Production and Development: Ashley Santora Vice President, Product Marketing: Roxanne McCarley Managing Producer, Digital Studio: Diane Lombardo Senior Product Marketer: Tricia Murphy Digital Studio Producer: Melissa Honig Product Marketing Assistant: Marianela Silvestri Digital Studio Producer: Alana Coles Manager of Field Marketing, Business Publishing: Digital Content Team Lead: Noel Lotz Adam Goldstein Digital Content Project Lead: Noel Lotz Senior Field Marketing Manager: Carlie Marvel Project Management: Integra Software Services Vice President, Production and Digital Studio, Arts and Technical Illustrator: Richard Parkin Business: Etain O'Dea Interior Design: Emily Friel, Integra Software Services Director of Production, Business: Jeff Holcomb Cover Design: Emily Friel, Integra Software Services Managing Producer, Business: Alison Kalil Cover Art: Leonori/Shutterstock; Kukuruxa/Shutterstock Content Producer: Nancy Freihofer Printer/Binder: LSC Communications, Inc./Kendallville Operations Specialist: Carol Melville Cover Printer: Phoenix Color/Hagerstown

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ISBN 10: 0-13-474447-0 ISBN 13: 978-0-13-474447-6

A01_PARK4476_13_SE_FM.indd 6 11/1/17 12:42 PM ABOUT THE AUTHOR◆

Michael Parkin is Professor Emeritus in the Department of Economics at the University of Western Ontario, Canada. Professor Parkin has held faculty ­appointments at Brown University, the University of Manchester, the University of Essex, and Bond University. He is a past president of the Canadian Economics ­Association and has served on the editorial boards of the American Economic Review­ and the Journal of Monetary Economics and as managing editor of the Canadian ­Journal of Economics. Professor Parkin’s research on macroeconomics, monetary ­economics, and international economics has resulted in over 160 publications in ­journals and edited volumes, including the American Economic Review, the Journal of Political Economy, the Review of Economic Studies, the Journal of Monetary Economics,­ and the Journal of Money, Credit and Banking. He became most visible to the public with his work on inflation that discredited the use of wage and price ­controls. Michael Parkin also spearheaded the movement toward European ­monetary union. Professor Parkin is an experienced and dedicated teacher of introductory ­economics.

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A01_PARK4476_13_SE_FM.indd 9 11/1/17 12:42 PM BRIEF CONTENTS◆

PART ONE CHAPTER 12 Perfect Competition 275 INTRODUCTION 1 CHAPTER 13 Monopoly 301

CHAPTER 1 What is Economics? 1 CHAPTER 14 Monopolistic Competition 327 CHAPTER 2 The Economic Problem 33 CHAPTER 15 Oligopoly 345

PART TWO PART FIVE HOW MARKETS WORK 59 MARKET FAILURE AND GOVERNMENT 373

CHAPTER 3 Demand and Supply 59 CHAPTER 16 Public Choices, Public Goods, and Healthcare 373 CHAPTER 4 Elasticity 87 CHAPTER 17 Externalities 395 CHAPTER 5 Efficiency And Equity 109 CHAPTER 6 Government Actions in Markets 131 PART SIX CHAPTER 7 Global Markets in Action 155 FACTOR MARKETS, INEQUALITY, AND UNCERTAINTY 423 PART THREE HOUSEHOLDS’ CHOICES 181 CHAPTER 18 Markets for Factors of Production 423 CHAPTER 19 449 CHAPTER 8 Utility and Demand 181 CHAPTER 20 Uncertainty and Information 473 CHAPTER 9 Possibilities, Preferences, and Choices 205

PART FOUR FIRMS AND MARKETS 227

CHAPTER 10 Organizing Production 227 CHAPTER 11 Output and Costs 251

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A01_PARK4476_13_SE_FM.indd 11 11/1/17 12:42 PM ◆ALTERNATIVE PATHWAYS THROUGH THE CHAPTERS

Flexibility

Chapter 1 Chapter 5 Chapter 6 Chapter 16

What Is Economics? Efficiency and Equity Government Actions Public Choices, in Markets Public Goods, and Healthcare

Chapter 2 Chapter 19 Chapter 7 Chapter 17

The Economic Problem Economic Inequality Global Markets Externalities in Action

Chapter 3 Chapter 4 Chapter 12

Demand and Supply Elasticity Perfect Competition

Chapter 13

Chapter 10 Chapter 11 Monopoly

Organizing Production Output and Costs

Chapter 14 Chapter 8 Chapter 20 Monopolistic Competition Utility and Demand Uncertainty and Information

Chapter 9 Chapter 15

Possibilities, Oligopoly Preferences, and Choices

Chapter 18

Markets for Factors of Production

Start here ... … then jump to … and jump to any of these after any of these … doing the pre-requisites indicated

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◆ New To This Edition Chapter 2 also has an expanded explanation and graphical derivation of the outward-bowed PPF. All data figures, tables, and explanations thoroughly A revised At Issue feature in Chapter 5 on the ­updated to the latest available; four main content minimum wage now includes David Neumark’s changes; 30 new Economics in the News items based combination of all the most recent empirical studies on recent events and issues; almost 100 new news-based and Michael Luca’s Stanford Institute for Economic problems and applications; and all seamlessly integrated Policy Research pioneering study using a huge dataset with MyLab Economics and Pearson eText: These are from online review resource Yelp. the hallmarks of this thirteenth edition­ of Microeconomics. AT ISSUE

Does the Minimum Wage Cause Unemployment? Main Content Changes In the United States, the federal government’s Fair Labor Standards Act sets the federal minimum wage. In 2017, it was $7.25 an hour, a level set in 2009. Most states have a minimum wage that exceeds the federal minimum. Chapter 1 now contains an entirely new section, Does the minimum wage result in unemployment? And if so, how much unemployment does it create? “Economists in the Economy”, which describes the No, It Doesn’t Yes, It Does David Card of the University of California at ■ David Neumark of the University of California, types of jobs available to economics majors, their Berkeley and Alan Krueger of Princeton University Irvine combined all the most recent studies and says conducted a very large and carefully designed they show that a 10 percent rise in the minimum telephone survey of more than 400 employers of earnings compared with majors in other related areas, wage decreases teenage employment by between 1 and workers who earn the minimum wage. They say:

and the critical thinking, analytical, math, writing, and ■ An increase in the minimum wage increases ■ Daniel Hamermesh of the University of Texas, at teenage employment and decreases unemployment. Austin says that firms anticipated the rise and cut oral communication skills needed for a successful ■ Their study of minimum wages in California, New employment before the minimum wage goes up. Jersey, and Texas found that the employment rate of ■ Finis Welch of Texas A&M University and Kevin career in economics. low-income workers increased following an increase Murphy of the University of Chicago say regional in the minimum wage. dierences in caused the employ- ■ A higher wage increases employment by making ment eects that Card and Krueger found. workers more conscientious and productive as well ■ Michael Luca of the Stanford Institute for as less likely to quit, which lowers unproductive Economic Policy Research used a huge dataset FIGURE 1.4 Earnings of Economics Majors labor turnover. from online review resource Yelp and found that a ■ A higher wage rate also encourages managers to higher minimum wage rate increases the business seek ways to increase labor productivity. failure rate. Chemical engineering Applied mathematics Economics Statistics Mathematics Economics in the News Finance The new Economics in the News features are listed Political science at the end of this book. They are all chosen to address Advertising current issues likely to interest and motivate the Business student. An example is the one in Chapter 2 on the Sociology Rust Belt. Psychology

020 40 60 80 100 120 ECONOMICS IN THE NEWS Earnings (thousands of dollars per year) Starting salary Increase by mid-career Production Possibilities in Economics majors are not the highest earners—chemical the Rust Belt engineers and applied mathematicians earn more—but at Can President Trump Rescue the Rust Belt? $100,000 a year in mid-career, economists earn more than The Week March 18, 2017 most other majors. President Trump promised to reverse the decades-long decline of manufacturing jobs. Can it be done? … Source of data: American Economics Association, … The region, which stretches from western New York to Pennsylvania, Ohio, Michigan, https://www.aeaweb.org/resources/students/careers/earnings Indiana, Illinois, and Wisconsin, has been in serious decline since 1979—the year that U.S. manufacturing employment peaked. Over the past four decades, manufacturing jobs have plunged by 7 million as factories have downsized, closed, and outsourced work to low-wage MyLab Economics Animation countries such as Mexico and China. … Trump already claims credit for pressuring several companies, including Carrier, to keep or create jobs in the U.S. … in exchange for various economic incentives. [And he] has floated the possibility of taris and import taxes of 20 to 35 percent on products made in Mexico, China, and other countries. … Chapter 2 has a new section prompted by the Will these policies work? Few economists think so: … About 85 percent of the 5 million fac- tory jobs lost between 2000 and 2010 can be blamed on technology and robots, according to a Ball State Univer- ongoing concern about the rust-belt economy, its sity study. That’s why virtually all economists agree that ESSENCE OF THE STORY bringing back millions of lost jobs is unlikely. … ■ The Rust Belt is hurting because manufacturing jobs have fallen by 7 million since 1979. causes and cures, which describes and illustrates the So, are Rust Belt workers doomed? Not necessarily. But ■ President Trump proposes economic incentives economists agree they do need to be retrained for the to keep or create jobs in the United States and changing patterns of production as an economy new manufacturing age, which requires workers who can taxes on imports from Mexico and China. program and operate computers and robots. The U.S. ■ Few economists think these policies will work expands, and explains how technical change and eco- will need to fill 3.5 million skilled jobs in specialized because most of the factory jobs lost resulted manufacturing over the next decade, according to a 2016 from new technology and robots. White House report. … ■ Economists say that Rust Belt workers need to nomic growth first shrinks the share of agriculture as be retrained to operate new technologies. “Can President Trump Rescue the Rust Belt?” The Week, March 18, 2017,Retrieved from: manufacturing expands and later shrinks the share of http://theweek.com/articles/686314/president-trump-rescue-rust-belt manufacturing as services expand. MyLab Economics Economics in the News

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News-Based Problems and Applications purpose. Economics in the News and At Issue are de- Just a sample of the topics covered in the 100 new signed to achieve this goal. news-based problems and applications include: Each chapter opens with a student-friendly Shrinking brick-and-mortar retail and expanding vignette that raises a question to motivate and focus ­online shopping; fixed price food at the ball game; the chapter. The chapter explains the principles, or why tuition is so high; Facebook and Google in model, that address the question and ends with an mobile ads market; Starburst “All Pink”; La La Land Economics in the News application that helps students has the worst traffic congestion; and merit pay for to think like economists by connecting chapter tools teachers. and concepts to the world around them. All these news exercises are in MyLab with instant targeted feedback and auto-grading and constant uploading of new current exercises. ◆ Solving Teaching and Learning In many chapters, an additional briefer Economics in the News (shown here) presents a short news clip, Challenges supplemented by data where needed, poses some questions, and walks through the answers. To change the way students see the world: this is my goal in teaching economics, in writing this book, and in playing a major role in creating content for MyLab ECONOMICS IN THE NEWS Economics. The Market for College Education Why Is Tuition So High? Three facts about students are my guiding Is tuition high because professors are overpaid? Is it high because of cuts in state support for public colleges? A principles. First, they want to learn, but they are National Bureau of Economic Research study says tuition is high because of the ready availability of federal student over-whelmed by the volume of claims on their time aid. The more money students can borrow, the more col- leges can charge. and energy. So, they must see the relevance to their Source: Inside Higher Ed., February 9, 2016 THE DATA lives and future careers of what they are being asked The scatter diagram provides data on college enroll - ■ The supply curve of college education, S, slopes ments and tuition from 1971 through 2015. upward because the principle of increasing opportu- to learn. Second, students want to get it, and get it nity cost applies to college education just as it does 24,000

year) 15 quickly. So, they must be presented with clear and ■ In 2001, the demand for college education was 18,000 11 D2001. The equilibrium tuition was $14,000 and 01 10 million students were enrolled in college. succinct explanations. And third, students want to 12,000 ■ 71 91 Between 2001 and 2015: make sense of today’s world and be better prepared 6,000 81 1) Income per person increased 2) Population increased, and uition (2016 dollars per T for life after school. So, they must be shown how to 0 6 8 10 12 14 16 3) More new jobs required higher education. Enrollment (millions of students per year) ■ These (and possibly other) factors increased the apply the timeless principles of economics and its Figure 1 Enrollments and Tuition: 1971–2015 demand for a college education. The demand D2015. Equilibrium models to illuminate and provide a guide to under- THE QUESTIONS ■ What does the scatter diagram tell us? ■ Why has college tuition increased? Is it because standing today’s events and issues, and the future An increase in population, a

demand increased or supply decreased? year) 30 rise in income, and changes in jobs increased the demand for challenges they are likely to encounter. S THE ANSWERS college education ... The organization of this text and MyLab arise ■ The scatter diagram tells us that in most years from 25 1971 through 2015, both tuition and enrollments directly from these guiding principles. Each chapter increased. In some years, tuition increased and enroll- 21 ments decreased, but those years are few. ... tuition ■ D2015 begins with a clear statement of learning objectives An increase in demand brings a rise in the price increased ...... and the quantity and an increase in the quantity. 14 supplied increased ■

Because both the price (tuition) and quantity (enroll- uition (thousands of 2013 dollars per that correspond to each chapter section. T ments) increased, the demand for college education 10 D2001 The learning resources also arise directly from increased. ■ A decrease in supply brings a rise in price and a de- the three guiding principles, and I will describe them crease in the quantity. ■ Because the price and the quantity increased in most 0 5 10 13 15 20 by placing them in five groups: years, the supply of college education did not decrease. Enrollment (millions) ■ The figure shows the market for college education. Figure 2 The Market for College Education

MyLab Economics Economics in the News ■■ Making economics real ■■ Learning the vocabulary Seven At Issue boxes, one of which is new, ■■ Seeing the action and telling the story ­engage the student in debate and controversy. An ■■ Learning interactively—learning by doing At Issue box introduces an issue and then presents ■■ MyLab Economics two opposing views. It leaves the matter unsettled so that students and the instructor can continue the argument in class and reach their own Making Economics Real conclusions. The student needs to see economics as a lens that Economics in Action boxes make economics real sharpens the focus on real-world issues and events, by providing data and information that links models and not as a series of logical exercises with no real to real-world economic activity. Some of the issues

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covered in these boxes include the best affordable Showing the Action and Telling the Story choice of recorded music; the low cost of making Through the past twelve editions, this book has set the and the high cost of selling a pair of shoes; how standard of clarity in its diagrams; the thirteenth edi- Apple doesn’t make the iPhone; opposing trends in tion continues to uphold this tradition. My goal is to air pollution and carbon concentration; and the size show “where the economic action is.” The diagrams of the fiscal stimulus multipliers. in this book continue to generate an enormously posi- Interviews with leading economist, whose work tive response, which confirms my view that graphical correlates to what the student is learning, are the final analysis is the most powerful tool available for teach- component of making economics real. These inter- ing and learning economics at the principles level. views explore the education and research of promi- Recognizing that some students find graphs hard nent economists and their advice for those who want to work with, I have developed the entire art program to continue studying the subject. with the study and review needs of the student in mind.

Broken pipeline decreases TALKING WITH Esther Duflo* the supply of gasoline ...

SB SN ESTHER DUFLO is the Abdul Latif Jameel Professor of Alleviation and at the Massachusetts Institute of Technology. Among her many honors are the 2010 John Bates Clark Medal for the best ... the price economist under 40 and the Financial Times and Gold- man Sachs Business Book of the Year Award in 2011 of gasoline Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. e (dollars per gallon) rises ... Professor Duflo’s research seeks to advance our under- standing of the economic choices of the extremely poor ric P 2.32 by conducting massive real-world experiments. Professor Duflo was an undergraduate student of history and economics at École Normale Supérieure and completed a master’s degree at DELTA in Paris before moving to the United States. She earned her PhD in Eco- ... and the nomics at MIT in 1999. Michael Parkin talked with her about her work, quantity which advances our understanding of the economic choices and condition of the very poor. demanded 2.11 decreases

Professor Duflo, what’s the story about how you The very poor whom you study are people who live on became an economist and in particular the architect $1 a day or $2 a day. … Is $1 a day a true measure of experiments designed to understand the economic choices of the very poor? For defining the poverty line, we don’t include the D When I was a kid, I was exposed to many stories cost of housing. The poor also get free goods, some- times of bad quality (education, healthcare) and the engagement as a doctor in a small NGO dealing value of those is also not included. Other than that,

stories about children living all around the world. Moreover, you have to realize this is everything, I remember asking myself how taking into account the fact that I could justify my luck of being … imagine living on under a dollar life is much cheaper in many born where I was. I had a very a day after your rent is paid in exaggerated idea of what it was Seattle or Denver. Not easy!

su cient discomfort that I knew (e.g., a haircut) is cheaper. 0 90 100 For example, in , the purchasing power of accident, I discovered that economics was the way in Quantity (percentage of normal) which I could actually be useful: While spending a about 3 times what it is in the United States. So the year in Russia teaching French and studying History, poverty line we use for India is 33 cents per day, not The Market for Gasoline intervene in the world while keeping enough sanity to All told, you really have to imagine living on analyze it. I thought this would be ideal for me and I have never regreted it. I have the best job in the world. The diagrams feature

■■ Axes that measure and display concrete real-world Learning the Vocabulary data, and where possible and relevant, the most Learning the vocabulary isn’t exciting, but it is the recent data vital first step to every discipline and it needs to be ■■ Graphs paired with data tables from which curves effective and quick. Highlighted key terms simplify are plotted this task. Each key term is defined in the sentence in ■■ Original curves consistently shown in blue which it it highlighted and appears in an end-of-chap- ter list and the end-of-book glossary (both with its ■■ Shifted curves, equilibrium points, and other im- page number); boldfaced in the index; and in MyLab portant features highlighted in red Economics in an interactive glossary, Flash Card tool, ■■ Color-blended arrows to indicate movement and in an auto-graded Key Terms Quiz with targeted ■■ Diagrams labeled with boxed notes that tell the story student feedback. ■■ Extended captions that make each diagram and its caption a self-contained object for study and review

Key Terms MyLab Economics Key Terms Quiz Change in demand, 62 Demand curve, 62 Quantity demanded, 61 Change in supply, 67 Equilibrium price, 70 Quantity supplied, 66 Learning Interactively—Learning by Doing Change in the quantity Equilibrium quantity, 70 Relative price, 60 demanded, 65 Inferior good, 64 Substitute, 63 At the end of every chapter section, a Review Quiz in- Change in the quantity supplied, 68 Law of demand, 61 Supply, 66 Competitive market, 60 Law of supply, 66 Supply curve, 66 vites the student to rework the section with questions Complement, 63 Money price, 60 Demand, 61 Normal good, 64 that cover the key ideas. A parallel set of questions

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in MyLab Study Plan enable the student to work the instructors have chosen MyLab for over 15 years, questions and get instant targeted feedback. touching the lives of over 50 million students. As part of the chapter review, the student has an opportunity to work a multi-part problem that covers the core content of the chapter and consists ◆ Developing Employability Skills of questions, solutions, key points, and a key figure. This feature increases the incentive for the student The economic way of thinking is a foundational to learn-by-doing and review the chapter actively, skill for citizenship and career. Every feature of the rather than passively. The worked problems are also text helps the student develop this skill, repeatedly available in MyLab Study Plan along with interactive using its central ideas of tradeoff; opportunity cost; animations of the problem’s key figure. the margin; incentives; the gains from voluntary exchange; the forces of demand, supply, and equilib- rium; the pursuit of economic rent; and the tension MyLab™ Economics between self-interest and the social interest. The new section of Chapter 1, “Economists in Reach Every Student with MyLab the Economy”, identifies a further five general skills Economics MyLab is the teaching and learning plat- that are crucial for getting a job and developing a form that empowers you to reach every student. By successful career. The table lists these skills and the combining trusted author content with digital tools features of this text that promote them. and a flexible platform, MyLab personalizes the learning experience and improves results for each stu- CAREER SKILLS AND THE FEATURES THAT dent. Learn more about MyLab Economics. With our PROMOTE THEM new enhanced Pearson eText, students will be able to interact with Figure Animations right in line with Skill Feature the text. Each chapter then concludes with a Worked Critical thinking Economics in the News Problem that consists of questions, solutions, and a At Issue key figure. Analytical skills The economic way of thinking Deliver Trusted Content You deserve teaching Manipulation of models materials that meet your own high standards for Application of models your course. That’s why we partner with highly re- Graphical analysis spected authors to develop interactive content and Math skills Math appendices course-specific resources that you can trust — and that keep your students engaged. The Economics Writing skills Review Quiz and end-of-Chapter prob- in the News stories address current issues that lems and applications as short-answer are likely to interest and motivate students, and are written assignments available to be assigned and auto-graded within Oral communication Economics in the News and At Issue MyLab Economics. skills as topics for classroom discussion and debate Empower Each Learner Each student learns at a different pace. Personalized learning pinpoints the precise areas where each student needs practice; giv- ◆ Table of Contents Overview ing all students the support they need — when and and Flexibility where they need it — to be successful. You have preferences for how you want to teach your Teach Your Course Your Way Your course is course, and I’ve organized this book to enable you to unique. So whether you’d like to build your own as- choose your teaching path. The chart on p. vi illustrates signments, teach multiple sections, or set prerequi- the book’s flexibility. By following the arrows through sites, MyLab Economics gives you the flexibility to the chart you can select the path that best fits your easily create your course to fit your needs. preference for course structure. Whether you want to teach a traditional course that blends theory and policy, Improve Student Results When you teach with or one that takes a fasttrack through either theory or MyLab, student performance improves. That’s why policy issues, this text gives you the choice.

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◆ Instructor Teaching Resources The program comes with the following teaching resources.

Supplements available to instructors at www.pearsonhighered.com/irc Features of the Supplement

Instructor’s Manual ●● Chapter-by-chapter overviews Microeconomics Instructor’s Manual by Laura A.Wolff, ●● List of what’s new in the thirteenth edition Southern Illinois University ●● Ready-to-use lecture notes

Solutions Manual ●● Solutions to Review Quizzes Microeconomics Solutions Manual by Mark Rush, ●● Solutions to the end-of-chapter Study Plan Problems University of Florida and Applications ●● Solutions to the end-of-chapter Additional Problems and Applications

Test Bank ●● Nearly 7,000 multiple-choice, true/false, short-answer, New questions for the Microeconomics and graphing questions with these annotations: Test Bank by Svitlana Malsymenko, ■■ Difficulty level (1 for straight recall, 2 for some analysis, ­ University of Pittsburgh, and James K. 3 for complex analysis) Self, Lee College ■■ Type (Multiple-choice, true/false, short-answer, essay Mark Rush, University of Florida, reviewed all questions Topic (The term or concept the question supports) AACSB to ensure their clarity and consistency learning­ standard

Computerized TestGen ●● TestGen enables instructors to: ■■ Customize, save, and generate classroom tests ■■ Edit, add, or delete questions from the Test Item Files ■■ Analyze test results ■■ Organize a database of tests and student results.

PowerPoints ●● Slides include: ■■ Lectures with all the textbook figures and tables animated and speaking notes from the Instructor’s Manual ■■ Large-scale versions of all textbook figures and tables animated, for instructors to incorporate into their own slide shows ●● A student version of the lectures with animated textbook figures and tables. ●● Accessibility PowerPoints meet standards for students with ­disabilities. Features include, but not limited to: ■■ Keyboard and Screen Reader access ■■ Alternative text for images ■■ High color contrast between background and foreground colors

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◆ Acknowledgments Tricia Murphy, Senior Product Marketer, and Carlie Marvel, Senior Field Marketing Manager, I thank my current and former colleagues and friends provided inspired marketing strategy and direction. at the University of Western Ontario who have taught Catherine Baum provided a careful, consistent, me so much. They are Jim Davies, Jeremy Greenwood, and intelligent copy edit and accuracy check, and Ig Horstmann, Peter Howitt, Greg Huffman, David wrote original news articles for Economics in the Laidler, Phil Reny, Chris Robinson, John Whalley, News. And Heather Johnson with the other mem- and Ron Wonnacott. I also thank Doug McTaggart bers of an outstanding editorial and production and Christopher Findlay, co-authors of the Australian team at Integra kept the project on track on a tight edition, and Melanie Powell and Kent Matthews, schedule. co- authors of the European edition. Suggestions I thank all of these wonderful people. It has arising from their adaptations of earlier editions have been inspiring to work with them and to share been helpful to me in preparing this edition. in creating what I believe is a truly outstanding I thank Rebecca Stein for her thoughtful sug- educational­ tool. gestions and constructive criticism that brought I thank our talented thirteenth edition supple- extensive improvement to my treatment of health- ments authors and contributors—Luke Armstrong, care, public goods, and externalities; Yoram Bauman Svitlana Maksymenko, Russ McCullough, Alexandra for careful and helpful reviews of my coverage of Nica, Jim Self, Laurie Wolff, and Jeannie Shearer. environmental externalities; and Sameh Ajlouni of Thanks, also, to Trevor Collier of the University of Yarmouk University for spotting an error. Dayton for reviewing MyLab exercises. I thank the several thousand students whom I have I especially thank Mark Rush, who yet again been privileged to teach. The instant response that played a crucial role in creating another edition of comes from the look of puzzlement or enlightenment this text and package. Mark has been a constant has taught me how to teach economics. source of good advice and good humor. It is a special joy to thank the many outstanding I thank the many exceptional reviewers who people at Pearson who contributed to the concerted have shared their insights through the various edi- publishing effort that brought this edition to comple- tions of this book. Their contribution has been tion. Denise Clinton played a major role in the invaluable. evolution of this text since its third edition, and her I thank the people who work directly with me. insights and ideas can still be found throughout this Jeannie Shearer provided outstanding research assis- new edition. tance on many topics, including finding news articles Donna Battista, Vice President, Business and creating MyLab exercises. Richard Parkin created Publishing, is hugely inspiring and has provided the electronic art files and offered many ideas that ­overall direction to the project. improved the figures in this book. Robin Bade man- As ever, Adrienne D’Ambrosio, Director of aged an ever-growing and ever more complex MyLab Portfolio Management, played a major role in database. And Sharmistha Nag helped me to create shaping this revision and the many outstanding news-based exercises, and Draw Graph exercises. supplements that accompany it. Adrienne brings As with the previous editions, this one owes an intelligence and insight to her work and is the enormous debt to Robin Bade. I dedicate this book ­un­challengeable pre-eminent economics director. to her and again thank her for her work. I could Ashley Bryan, Portfolio Manager, directed the not have written this book without the tireless and ­development of this edition. Heather Johnson, selfless help she has given me. My thanks to her are ­Project Manager, oversaw the production and design unbounded. process, coordinated the photo research program, Classroom experience will test the value of this and worked with rights and permissions advisors. book. I would appreciate hearing from instructors Nancy Freihofer, Content Producer, provided a and students about how I can continue to improve it steady hand throughout the revision process and in future editions. managed the team of supplements authors. Digital Content Team Lead Noel Lotz managed a complex and thorough reviewing process for the Michael Parkin content of MyLab Economics; and Melissa Honig, London, Ontario, Canada Digital Studio Project Manager, ensured that all our [email protected] media assets were correctly assembled.

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Michael Carter, University of Massachusetts, Lowell ◆ Reviewers Edward Castronova, California State University, Fullerton Eric Abrams, Hawaii Pacific University Francis Chan, Fullerton College Christopher Adams, Federal Trade Commission Ming Chang, Dartmouth College John T. Addison, University of South Carolina Subir Chakrabarti, Indiana University-Purdue University Tajudeen Adenekan, Bronx Community College Joni Charles, Texas State University Syed Ahmed, Cameron University Adhip Chaudhuri, Georgetown University Frank Albritton, Seminole Community College Gopal Chengalath, Texas Tech University Milton Alderfer, Miami-Dade Community College Daniel Christiansen, Albion College William Aldridge, Shelton State Community College Kenneth Christianson, Binghamton University Donald L. Alexander, Western Michigan University John J. Clark, Community College of Allegheny County, Al- Terence Alexander, Iowa State University legheny Campus Stuart Allen, University of North Carolina, Greensboro Cindy Clement, University of Maryland Sam Allgood, University of Nebraska, Lincoln Meredith Clement, Dartmouth College Neil Alper, Northeastern University Michael B. Cohn, U. S. Merchant Marine Academy Alan Anderson, Fordham University Robert Collinge, University of Texas, San Antonio Lisa R. Anderson, College of William and Mary Carol Condon, Kean University Jeff Ankrom, Wittenberg University Doug Conway, Mesa Community College Fatma Antar, Manchester Community Technical College Larry Cook, University of Toledo Kofi Apraku, University of North Carolina, Asheville Bobby Corcoran, retired, Middle Tennessee State University John Atkins, University of West Florida Kevin Cotter, Wayne State University Moshen Bahmani-Oskooee, University of Wisconsin, Milwaukee James Peery Cover, University of Alabama, Tuscaloosa Donald Balch, University of South Carolina Erik Craft, University of Richmond Mehmet Balcilar, Wayne State University Eleanor D. Craig, University of Delaware Paul Ballantyne, University of Colorado Jim Craven, Clark College Tannista Banerjee, Auburn University Jeremy Cripps, American University of Kuwait Sue Bartlett, University of South Florida Elizabeth Crowell, University of Michigan, Dearborn Jose Juan Bautista, Xavier University of Louisiana Stephen Cullenberg, University of California, Riverside Klaus Becker, Texas Tech University David Culp, Slippery Rock University Valerie R. Bencivenga, University of Texas, Austin Megan Cummins, Santiago Canyon College Ben Bernanke, Chairman of Federal Reserve Norman V. Cure, Macomb Community College Radha Bhattacharya, California State University, Fullerton Dan Dabney, University of Texas, Austin Margot Biery, Tarrant County College, South Andrew Dane, Angelo State University John Bittorowitz, Ball State University James D’Angelo, University of Cincinnati David Black, University of Toledo Joseph Daniels, Marquette University Kelly Blanchard, Purdue University Gregory DeFreitas, Hofstra University S. Brock Blomberg, Claremont McKenna College David Denslow, University of Florida William T. Bogart, Case Western Reserve University Shatakshee Dhongde, Rochester Institute of Technology Giacomo Bonanno, University of California, Davis Iris Diamond, Austin Community College Tan Khay Boon, Nanyard Technological University Mark Dickie, University of Central Florida Sunne Brandmeyer, University of South Florida James Dietz, California State University, Fullerton Audie Brewton, Northeastern Illinois University Carol Dole, State University of West Georgia Baird Brock, Central Missouri State University Ronald Dorf, Inver Hills Community College Avis Brown, Dallas Community College District John Dorsey, University of Maryland, College Park Byron Brown, Michigan State University Eric Drabkin, Hawaii Pacific University Imam Bulbul, University of Miami Amrik Singh Dua, Mt. San Antonio College Jeffrey Buser, Columbus State Community College Thomas Duchesneau, University of Maine, Orono Alison Butler, Florida International University Lucia Dunn, Ohio State University Colleen Callahan, American University Donald Dutkowsky, Syracuse University Tania Carbiener, Southern Methodist University John Edgren, Eastern Michigan University Kevin Carey, American University David J. Eger, Alpena Community College Scott Carrell, University of California at Davis Harold W. Elder, University of Alabama Kathleen A. Carroll, University of Maryland, Baltimore County Harry Ellis, Jr., University of North Texas

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Ibrahim Elsaify, Goldey-Beacom College Randall Haydon, Wichita State University Kenneth G. Elzinga, University of Virginia Denise Hazlett, Whitman College Patrick Emerson, Oregon State University Julia Heath, University of Memphis Tisha Emerson, Baylor University Jac Heckelman, Wake Forest University Monica Escaleras, Florida Atlantic University Jolien A. Helsel, Kent State University Antonina Espiritu, Hawaii Pacific University James Henderson, Baylor University Gwen Eudey, University of Pennsylvania Doug Herman, Georgetown University Barry Falk, Iowa State University Jill Boylston Herndon, University of Florida M. Fazeli, Hofstra University Gus Herring, Brookhaven College Philip Fincher, Louisiana Tech University John Herrmann, Rutgers University F. Firoozi, University of Texas, San Antonio Andrew Hill, Temple University Lou Foglia, Suffolk University John M. Hill, Delgado Community College Nancy Folbre, University of Massachusetts, Amherst Jonathan Hill, Florida International University Kenneth Fong, Temasek Polytechnic (Singapore) Lewis Hill, Texas Tech University Steven Francis, Holy Cross College Steve Hoagland, University of Akron David Franck, University of North Carolina, Charlotte Tom Hoerger, Fellow, Research Triangle Institute Mark Frank, Sam Houston State University Calvin Hoerneman, Delta College Roger Frantz, San Diego State University George Hoffer, Virginia Commonwealth University Mark Frascatore, Clarkson University Dennis L. Hoffman, Arizona State University Alwyn Fraser, Atlantic Union College Paul Hohenberg, Rensselaer Polytechnic Institute Connel Fullenkamp, Duke University Jim H. Holcomb, University of Texas, El Paso Marc Fusaro, East Carolina University Robert Holland, Purdue University James Gale, Michigan Technological University Harry Holzer, Georgetown University Susan Gale, New York University Linda Hooks, Washington and Lee University Roy Gardner, Indiana University Gary Hoover, University of Oklahoma Sacha Gelfer, Bentley University Jim Horner, Cameron University Eugene Gentzel, Pensacola Junior College Djehane Hosni, University of Central Florida Kirk Gifford, Brigham Young University-Idaho Harold Hotelling, Jr., Lawrence Technical University Scott Gilbert, Southern Illinois University, Carbondale Calvin Hoy, County College of Morris Andrew Gill, California State University, Fullerton Ing-Wei Huang, Assumption University, Thailand Robert Giller, Virginia Polytechnic Institute and State University Julie Hunsaker, Wayne State University Robert Gillette, University of Kentucky Beth Ingram, University of Iowa James N. Giordano, Villanova University Jayvanth Ishwaran, Stephen F. Austin State University Maria Giuili, Diablo College Michael Jacobs, Lehman College Susan Glanz, St. John’s University S. Hussain Ali Jafri, Tarleton State University Robert Gordon, San Diego State University Dennis Jansen, Texas A&M University Richard Gosselin, Houston Community College Andrea Jao, University of Pennsylvania Paul Graf, Indiana University - Bloomington Barbara John, University of Dayton John Graham, Rutgers University Barry Jones, Binghamton University John Griffen, Worcester Polytechnic Institute Garrett Jones, Southern Florida University Wayne Grove, Syracuse University Frederick Jungman, Northwestern Oklahoma State University Robert Guell, Indiana State University Paul Junk, University of Minnesota, Duluth William Gunther, University of Southern Mississippi Leo Kahane, California State University, Hayward Jamie Haag, Pacific University, Oregon Veronica Kalich, Baldwin-Wallace College Gail Heyne Hafer, Lindenwood University John Kane, State University of New York, Oswego Rik W. Hafer, Southern Illinois University, Edwardsville Eungmin Kang, St. Cloud State University Daniel Hagen, Western Washington University Arthur Kartman, San Diego State University David R. Hakes, University of Northern Iowa Theresa Kauffman, Chattahoochee Technical College Craig Hakkio, Federal Reserve Bank, Kansas City Gurmit Kaur, Universiti Teknologi (Malaysia) Bridget Gleeson Hanna, Rochester Institute of Technology Louise Keely, University of Wisconsin, Madison Ann Hansen, Westminster College Manfred W. Keil, Claremont McKenna College Seid Hassan, Murray State University Elizabeth Sawyer Kelly, University of Wisconsin, Madison Jonathan Haughton, Suffolk University Rose Kilburn, Modesto Junior College

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Amanda King, Georgia Southern University Richard A. Miller, Wesleyan University John King, Georgia Southern University Judith W. Mills, Southern Connecticut State University Robert Kirk, Indiana University-Purdue University, Indianapolis Glen Mitchell, Nassau Community College Norman Kleinberg, City University of New York, Baruch College Jeannette C. Mitchell, Rochester Institute of Technology Robert Kleinhenz, California State University, Fullerton Bagher Modjtahedi, University of California, Davis Barry Kotlove, Edmonds Community College Michael A. Mogavero, University of Notre Dame John Krantz, University of Utah Khan Mohabbat, Northern Illinois University Joseph Kreitzer, University of St. Thomas Shahruz Mohtadi, Suffolk University Patricia Kuzyk, Washington State University Barbara Moore, University of Central Florida David Lages, Southwest Missouri State University W. Douglas Morgan, University of California, Santa Barbara W. J. Lane, University of New Orleans William Morgan, University of Wyoming Leonard Lardaro, University of Rhode Island James Morley, Washington University in St. Louis Kathryn Larson, Elon College William Mosher, Clark University Luther D. Lawson, University of North Carolina, Wilmington Joanne Moss, San Francisco State University Elroy M. Leach, Chicago State University Nivedita Mukherji, Oakland University Jim Lee, Texas A & M, Corpus Christi Francis Mummery, Fullerton College Sang Lee, Southeastern Louisiana University Edward Murphy, Southwest Texas State University Robert Lemke, Florida International University Kevin J. Murphy, Oakland University Mary Lesser, Iona College Kathryn Nantz, Fairfield University Philip K. Letting, Harrisburg Area Community College Arnab Nayak, Mercer University Jay Levin, Wayne State University William S. Neilson, Texas A&M University Arik Levinson, University of Wisconsin, Madison Paul Nelson, University of Louisiana, Monroe Tony Lima, California State University, Hayward Bart C. Nemmers, University of Nebraska, Lincoln William Lord, University of Maryland, Baltimore County Alexandra Nica, University of Iowa Nancy Lutz, Virginia Polytechnic Institute and State University Melinda Nish, Orange Coast College Brian Lynch, Lakeland Community College Melissa Noel, Austin Community College Murugappa Madhavan, San Diego State University Anthony O’Brien, Lehigh University K. T. Magnusson, Salt Lake Community College Norman Obst, Michigan State University Mark Maier, Glendale Community College Constantin Ogloblin, Georgia Southern University Svitlana Maksymenko, University of Pittsburgh Neal Olitsky, University of Massachusetts, Dartmouth Jean Mangan, Staffordshire University Business School Mary Olson, Tulane University Denton Marks, University of Wisconsin, Whitewater Terry Olson, Truman State University Michael Marlow, California Polytechnic State University James B. O’Neill, University of Delaware Akbar Marvasti, University of Houston Farley Ordovensky, University of the Pacific Wolfgang Mayer, University of Cincinnati Z. Edward O’Relley, North Dakota State University John McArthur, Wofford College Donald Oswald, California State University, Bakersfield Katherine McClain, University of Georgia Jan Palmer, Ohio University Amy McCormick, Mary Baldwin College Michael Palumbo, Chief, Federal Reserve Board Russ McCullough, Iowa State University Chris Papageorgiou, Louisiana State University Catherine McDevitt, Central Michigan University G. Hossein Parandvash, Western Oregon State College Gerald McDougall, Wichita State University Randall Parker, East Carolina University Stephen McGary, Brigham Young University-Idaho Robert Parks, Washington University Richard D. McGrath, Armstrong Atlantic State University David Pate, St. John Fisher College Richard McIntyre, University of Rhode Island James E. Payne, Illinois State University John McLeod, Georgia Institute of Technology Donald Pearson, Eastern Michigan University Mark McLeod, Virginia Polytechnic Institute and State ­University Steven Peterson, University of Idaho B. Starr McMullen, Oregon State University Mary Anne Pettit, Southern Illinois University, Sandra McPherson, Millersville University Edwardsville Mary Ruth McRae, Appalachian State University William A. Phillips, University of Southern Maine Kimberly Merritt, Cameron University Dennis Placone, Clemson University Charles Meyer, Iowa State University Charles Plot, California Institute of Technology, Pasadena Peter Mieszkowski, Rice University Mannie Poen, Houston Community College John Mijares, University of North Carolina, Asheville Kathleen Possai, Wayne State University

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Ulrika Praski-Stahlgren, University College in Gavle- Jacek Siry, University of Georgia Sandviken, Sweden Chuck Skoro, Boise State University Edward Price, Oklahoma State University Phil Smith, DeKalb College Rula Qalyoubi, University of Wisconsin, Eau Claire William Doyle Smith, University of Texas, El Paso K. A. Quartey, Talladega College Sarah Stafford, College of William and Mary Herman Quirmbach, Iowa State University Rebecca Stein, University of Pennsylvania Jeffrey R. Racine, University of South Florida Frank Steindl, Oklahoma State University Ramkishen Rajan, George Mason University Jeffrey Stewart, New York University Peter Rangazas, Indiana University-Purdue University, Indianapolis Rayna Stocheva, University of Miami Vaman Rao, Western Illinois University Allan Stone, Southwest Missouri State University Laura Razzolini, University of Mississippi Courtenay Stone, Ball State University Rob Rebelein, University of Cincinnati Paul Storer, Western Washington University J. David Reed, Bowling Green State University Richard W. Stratton, University of Akron Robert H. Renshaw, Northern Illinois University Mark Strazicich, Ohio State University, Newark Javier Reyes, University of Arkansas Michael Stroup, Stephen F. Austin State University Jeff Reynolds, Northern Illinois University Robert Stuart, Rutgers University Rupert Rhodd, Florida Atlantic University Della Lee Sue, Marist College W. Gregory Rhodus, Bentley College Abdulhamid Sukar, Cameron University Jennifer Rice, Indiana University, Bloomington Terry Sutton, Southeast Missouri State University John Robertson, Paducah Community College Gilbert Suzawa, University of Rhode Island Malcolm Robinson, University of North Carolina, Greensboro David Swaine, Andrews University Richard Roehl, University of Michigan, Dearborn Christopher Swann, Temple University Carol Rogers, Georgetown University Manjuri Talukdar, Northern Illinois University William Rogers, University of Northern Colorado Jason Taylor, Central Michigan University Thomas Romans, State University of New York, Buffalo Mark Thoma, University of Oregon David R. Ross, Bryn Mawr College Janet Thomas, Bentley College Thomas Ross, Baldwin Wallace College Kiril Tochkov, SUNY at Binghamton Robert J. Rossana, Wayne State University Kay Unger, University of Montana Kurt Rotthoff, Seton Hall University Anthony Uremovic, Joliet Junior College Jeffrey Rous, University of North Texas David Vaughn, City University, Washington Rochelle Ruffer, Youngstown State University Don Waldman, Colgate University John Ruggiero, University of Daytona Francis Wambalaba, Portland State University Mark Rush, University of Florida Sasiwimon Warunsiri, University of Colorado at Boulder Dasha Safonova, University of Notre Dame Rob Wassmer, California State University, Sacramento Allen R. Sanderson, University of Chicago Paul A. Weinstein, University of Maryland, College Park Gary Santoni, Ball State University Lee Weissert, St. Vincent College Jeffrey Sarbaum, University of North Carolina at Greensboro Robert Whaples, Wake Forest University Peter Saunders, Central Washington University David Wharton, Washington College John Saussy, Harrisburg Area Community College Mark Wheeler, Western Michigan University Don Schlagenhauf, Florida State University Charles H. Whiteman, University of Iowa David Schlow, Pennsylvania State University Sandra Williamson, University of Pittsburgh Paul Schmitt, St. Clair County Community College Brenda Wilson, Brookhaven Community College Jeremy Schwartz, Hampden-Sydney College Larry Wimmer, Brigham Young University Martin Sefton, University of Nottingham Mark Witte, Northwestern University James K. Self, Indiana University Willard E. Witte, Indiana University Esther-Mirjam Sent, University of Notre Dame Mark Wohar, University of Nebraska, Omaha Rod Shadbegian, University of Massachusetts, Dartmouth Laura Wolff, Southern Illinois University, Edwardsville Neil Sheflin, Rutgers University Cheonsik Woo, Vice President, Korea Development Institute Gerald Shilling, Eastfield College Douglas Wooley, Radford University Dorothy R. Siden, Salem State College Arthur G. Woolf, University of Vermont Mark Siegler, California State University at Sacramento John T. Young, Riverside Community College Scott Simkins, North Carolina Agricultural and Technical State Michael Youngblood, Rock Valley College University Peter Zaleski, Villanova University

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Tianwei Zhang, University of Georgia Svitlana Maksymenko, University of Pittsburgh Jason Zimmerman, South Dakota State University Robert Martel, University of Connecticut David Zucker, Martha Stewart Living Omnimedia Katherine McClain, University of Georgia Russ McCullough, Iowa State University Barbara Moore, University of Central Florida Supplements Authors James Morley, Washington University in St. Louis Luke Armstrong, Lee College William Mosher, Clark University Sue Bartlett, University of South Florida Alexandra Nica, University of Iowa Kelly Blanchard, Purdue University Constantin Ogloblin, Georgia Southern University James Cobbe, Florida State University Edward Price, Oklahoma State University Carol Dole, Jacksonville University Mark Rush, University of Florida Karen Gebhardt, Colorado State University James K. Self, University of Indiana, Bloomington John Graham, Rutgers University Rebecca Stein, University of Pennsylvania Jill Herndon, University of Florida Michael Stroup, Stephen F. Austin State University Gary Hoover, University of Alabama Della Lee Sue, Marist College Patricia Kuzyk, Washington State University Nora Underwood, University of Central Florida Sang Lee, Southeastern Louisiana University Laura A. Wolff, Southern Illinois University, Edwardsville

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