In this writing assignment, you will be acting as an economic policy advisor. Your task is to read the scenario below, and do two things: 1) analyze the policy being considered using the analytical tools we have been developing in our course, and 2) write a brief, professional memo outlining your policy recommendation.
In the town of Tironto, there is a firm (MegaTire) that produces and sells snow tires. Because Tironto is pretty isolated, and snow tires are big and expensive to ship, this firm currently operates as a monopoly. Interestingly enough, MegaTire is currently owned and operated by the local government, and generates a consistent stream of revenue for Tironto. However, the city is not especially good at running tire factories – all of the experts consulted agreed that if this firm were run as a private company, the costs of producing tires would be lower.
Mayor McNeill is considering privatizing MegaTire; selling it to be run by private companies rather than operated by the town of Tironto. MegaTire actually has two factories that make the tires, so if the city decides to sell, it can be sold either as one firm, or divided up and sold as two firms. Mayor McNeill has contacted you for your advice as to the best course of action. You know him pretty well at this point, and know that he cares about both the potential revenue from the sale of the firm, and the well-being (consumer surplus) of the people of Tironto. He wants to know whether selling MegaTire is a good idea, and if the city does sell, whether it is better to sell it as one firm or two. Your research so far has indicated that there are a lot of potential buyers of MegaTire, so regardless of how the firm is divided up, Tironto would be able to find a buyer that would pay what the firm is worth.
Note: You may, if you wish, assume that there is a constant marginal cost of producing tires. You may also assume that the discount rate for everyone involved is the same, and that it is constant over time. Also, other markets for tires seem to compete in quantities rather than in prices, so it is safe to assume the same would be true in this case. Additionally, tires are subject to arbitrage, so price discrimination is not practical in this market.
Your task contains two parts, an analysis and a cover letter.
Analysis: In this section of your writing assignment, you should analyze the above scenario using the tools we have discussed in the course. You may assume that your audience has also had in our course. This means that you should model and describe the situation under consideration using tools we have discussed, and analyze the predictions of that model as it relates to the policy objectives. You should be clear about what you are considering when making your policy recommendations, and how those factors impact your decision. If you make any additional assumptions (beyond those mentioned above), you should clearly state them and if relevant, address what would happen if those assumptions do not hold.
Length: Your analysis part of the writing assignment should be approximately 700 words.
Cover Letter: In this section, you are communicating the main results from your analysis to Mayor McNeill in a clear and concise way. This letter should be professional but not technical in nature – it should explain the main ideas of your analysis in a way that can be understood by someone who is not an economist. The purpose of the cover letter is to summarize the information from your analysis – the things you say in your cover letter should be supported in your analysis section, and the main results of your analysis should be included in the cover letter. The cover letter should make a recommendation – this could be to sell MegaTire as a single firm, as two separate firms, or to not sell at all. Or, if you cannot make a clear recommendation without more information, describe what more you need to know, and how it would help you to make this decision.
Length: Your cover letter should be no more than one page (about 250 words), including the formatting. You should include your name and student number in the upper left-hand corner, but format the rest of this part of the assignment as a letter or a memo. We will not require a specific style for the letter, but it should include an appropriate salutation and closing, and be written in a professional tone.
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