Issue 76 September 2020 Critical Issues in Regulation – From the Journals Frank Ramsey: A Sheer Excess of Powers, (chapter 16 is titled ‘1928 Return to Mathematics’), Cheryl Misak, Oxford University Press, Oxford, 2020. Ramsey wrote two papers in consecutive years, 1927 and 1928, both of which were published in the This book is about the life, times and professional prestigious Economic Journal. career of Frank Ramsey (1903-1930). It is in excess of 500 pages in length, with the material organised The first of these papers was titled ‘A Contribution to into 19 chapters. The author, Cheryl Misak, the Theory of Taxation’ and was published in the describes Ramsey ‘as one of the most impressive March 1927 issue. This article contained an minds in the history of philosophy, mathematics and exposition of what is commonly called the ‘Ramsey economics, but, also one of the most attractive Rule’ which was highly influential in establishing the personalities’. Chapter 14 is titled ‘Cambridge area of study now known as ‘optimal taxation’. As Economics’ and chapter 15 is titled ‘Ramseyan described by Cheryl Misak, the ‘entire field of optimal Economics: The Feasible First Best’. This includes taxation now either follows the general outline of discussion of the origins of the Ramsey Rule for Ramsey’s solution (in the case of public utilities, commodity taxation, which has also been applied to where it is called Ramsey Pricing) or uses it as a utility pricing. backdrop to alternative solutions and new problems’ (p. 310). Chapter 15 includes a note contributed by Ramsey was born in Cambridge, and apart from Robin Boadway titled ‘The Legacy of Ramsey on some years at boarding school, he grew up there. Optimal Taxation’, which places this contribution in His father, Arthur Ramsey, was a prominent the subsequent literature, and also includes a mathematician at Cambridge University and held reference to Marcel Boiteux ‘who applied the Ramsey senior positions at Magdalene College. Frank problem to public utility pricing’. Ramsey was, as a student, at Trinity College. He was highly distinguished in Philosophy and The second paper, titled ‘A Mathematical Theory of Mathematics, including by topping his year as ‘Senior Savings’, was published in the December 1928 issue Wrangler’ in Mathematics. He spent some time in of The Economic Journal. Chapter 16 contains three Austria studying Philosophy, and while in Vienna, notes on this contribution; two by Partha Dasgupta subjected himself to extensive psychoanalysis by one and one by Pedro Garcia Duarte. The paper became of Freud’s most senior disciples. In Philosophy, he highly influential in establishing what is now known as later had professional interaction with Bertrand the optimal saving literature, later contributions to Russell, and made substantial contributions to the which were made by Nobel Prize winning economists literature. When Ramsey returned to Cambridge such as Kenneth Arrow, James Mirrlees, Franco from Austria in 1924 he was appointed as a Fellow at Modigliani and Robert Solow. Keynes was highly King’s College, where he lectured and published in praiseworthy of this paper, describing it as ‘one of the Mathematics, including seminal contributions such as most remarkable contributions to mathematical ‘Ramsey’s Theorem’. The famous Cambridge economics ever made, both in respect of the intrinsic economist, John Maynard Keynes, befriended and importance and difficulty of its subject, the power and mentored the young man, and introduced him to the elegance of the technical methods employed, and the avant garde Bloomsbury Group of artists and writers. clear purity of illumination with which the writer's mind is felt by the reader’. The chapter ends with a Chapter 14 provides the background about the perspective on the role of mathematics in economics, economists and the economics at Cambridge including reference to a 1927 paper by Ramsey, titled University. Ramsey became interested in economics ‘Mathematical Economics’, which is ‘nowhere to be because of the encouragement of John Maynard found’. Keynes and another leading Cambridge economist, Arthur Cecil Pigou, who are described as the ‘mainstays of the Cambridge School’. The leading Contents Cambridge socialist economists (Maurice Dobb, Piero Sraffa and Joan Robinson) were also important From the Journals 1 to Ramsey. During his brief sojourn into economics Regulatory Decisions in Australia and New Zealand 10 Literature Note: William Baumol and David Bradford The authors examine the relevance of this (‘Optimal Departures from Marginal Cost Pricing’, mechanism in the context of the US carbonated- American Economic Review, June 1970) also beverage industry. A recent wave of vertical mergers attribute the beginnings of both optimal taxation between upstream concentrate producers and theory and optimal utility pricing analysis to Ramsey’s downstream bottlers resulted in a ‘rich variation in 1927 paper: ‘[T]he formal mathematical propositions vertical structure across time and space’. Using this which are derived from optimality considerations and variation, the authors implement two complementary which are the subject of this paper, themselves have research designs to identify both the procompetitive a substantial history … As propositions on optimal and anticompetitive effects of vertical integration. taxation, they first appear in 1927 in Frank Ramsey’s The results of the empirical analysis suggest that pathbreaking article. [Further] Ramsey had in vertical integration in the US carbonated-beverage another context provided … a solution to the optimal industry caused anticompetitive price increases in pricing problem for an industry in which marginal products for which double margins were not costs do not cover total costs’ (p. 278). Baumol and eliminated. Bradford go on to discuss the contribution of Marcel There are seven sections in the paper: an untitled Boiteux (‘Sur la gestion des Monopoles Publics Introduction; Multiproduct Pricing and Vertical astreints a l'équilibre budgétaire’, Econometrica, Integration; The Carbonated Beverage Industry (two January 1956). Boiteux’s approach to utility pricing subsections); Data; The Impact of Vertical Integration has been linked to Ramsey as ‘Ramsey-Boiteux on Prices (three subsections); The Impact of Vertical Pricing’. Integration on Revenues; and Discussion and Policy Book Review: Cheryl Misak’s book, Frank Ramsey: Implications. A Sheer Excess of Powers, has been reviewed by There are 54 items in the reference list, with year of Carlisle Ford Runge for the Journal of Economic publication ranging from 1925 to 2020. Economists Literature (58, 3, September 2020, pp. 793-798). cited include John Asker, Jonathan Baker, Francis The Competitive Impact of Vertical Ysidro Edgeworth, Oliver Hart, Harold Hotelling, Integration by Multiproduct Firms, Fernando Janusz Ordover, Michael Riordan, Nancy Rose, Luco and Guillermo Marshall, American Economic Michael Salinger, Steven Salop, Jean Tirole and Review, 110, 7, July 2020, pp. 2041-2064. Michael Whinston. This paper is about the impact of vertical integration Amongst the references is the classic analysis of on pricing incentives in multiproduct industries, based double marginalisation; Joseph Spengler’s ‘Vertical on recent variation in vertical structure in the United Integration and Antitrust Policy’ published in The States (US) carbonated-beverage industry. While the Journal of Political Economy in 1950. elimination of double marginalisation with vertical The article can be accessed by subscription to The integration is normally characterised as American Economic Review. procompetitive, the authors argue that it may cause anticompetitive price increases in multiproduct COVID-19 Infection Externalities: Pursuing industries. The authors find that vertical integration Herd Immunity or Containment?, Zachary causes price decreases in products where double Bethune and Anton Korinek, Covid Economics, 11, margins are eliminated. However, they also find that 29 April 2020, pp. 1-34. there are price increases in the other products sold This paper is about the externalities that arise when by the integrated business. They call this the social and economic interactions transmit infectious Edgeworth-Salinger Effect. The authors contend that diseases such as COVID-19, and how public health these results provide new evidence of anticompetitive measures are essential because, acting individually, effects of vertical mergers. rational agents do not internalise that they impose The authors study a mechanism that arises when infection externalities upon others. In a vertical integration eliminates the double margins in Susceptibility-Infection-Recovery (SIR) model only a subset of the products sold downstream. The calibrated to capture the main features of COVID-19 products with eliminated double margins become in the United States (US) economy, the authors show relatively more profitable to sell, which gives the that the social cost including infection externalities is multiproduct business incentives to divert demand $286,000, more than three times higher than what toward these products. It does this by increasing the private agents perceive the cost of an additional prices of the products for which double margins were infection to be (around $80,000). This ‘mis-valuation’ not eliminated. These price increases are has implications for how society ultimately overcomes anticompetitive because of how they harm the the disease: individually rational susceptible agents