Question 1Chauffeurs are luxurious vehicles that consume more fuel when compared to other personal vehicles. These individuals in high positions use the chauffeurs to move around and thus spend much money on fuels especially in the current tough economy. Considering the comparative advantage, use of managerial perks is not justifiable; instead the top officials and officers should be given more options. This would mean they get higher utility as the monetary equivalent can be added in their pay. The use of other vehicles that use less fuel would decrease the opportunity cost.
The federal government has an incentive to the care of the chauffeurs. Hence, the government should specialize on other low fuel consuming vehicles in order to attain comparative advantage by avoiding misappropriating funds that are generated as surplus from their corporations. These individuals are able to use these kinds of luxurious chauffeurs because outsiders hardly observe them whereas if the value of chauffeurs is disclosed, it is underreported to stakeholders (Jensen 1986). Jensen (1986) claims that the use of chauffeurs signifies that these corporations have problem. This is the problem of having more money than a firm is able to spend and so channel it to unnecessary projects.
This is a wasteful practice and hence the use of chauffeurs is unjustifiable. In my opinion, I don’t think there is any difference when a government official or a corporate official travels in a lesser fuel consuming vehicle and using a chauffer. It is not justifiable for the use because there is no value added but rather the opportunity cost is increased. Furthermore, the purpose of the meeting is accomplished despite the means of transport used.
An example; assuming chauffeurs use more fuel both diesel and petrol while other personal vehicles use less amount of diesel and petrol. Let’s also assume that diesel is cheaper than petrol. Hence, the use of other personal vehicles would offer more comparative advantage if the government officials as well as managers use them instead of chauffeurs. Below is a diagram illustrating how a firm can save more by specializing and thus achieving comparative advantage. Monthly expenditure on fuel and maintenanceBefore specializationAfter specializationChauffeursPetrolDieselOther personal vehiclesPetrolDiesel650 million350 million1.2 million750 millionThe diagram shows that the government officials and others in high positions can save almost half of what they spend on fuel consumption after they specialize and thus achieve comparative advantage via decreasing opportunity cost.
The inefficiency can also be explained by a ‘production possibilities frontier’ diagram thereby emphasizing that use of perks is unjustified. (Riley 2006)Question 2Controlling the rent means putting a maximum price or price ceiling. Price ceilings affect the consumers because the supply goes down and hence the rental houses become fewer. According to Taylor (2006), price ceiling decrease efficiency because the marginal benefit of supply goes beyond marginal cost.
Rent control is meant to regulate the way landlords charge for their houses. However, rent controls are bad because the conditions of living become poor since houses are not renovated or repaired this means that both quality and quantity of the rental houses are affected. The diagram below shows how price ceiling affects the market for houses. In the diagram, the equilibrium price (P1) is way ahead of price ceiling. This means that a shortage (Qs to Qd) will result.
This also means that the landlords do not get enough money to spare for repairs and hence have to delay as observed in James’s case. MC represents marginal cost whereas MB represents the marginal value that the clients are able to pay at Q* (Taylor 2006).