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 vi CONTENTS

9.4 Long-Run Decisions 208 Chapter 12 Economic Efficiency and Public Policy 272
Entry and Exit 208 12.1 Productive and Allocative Efficiency 273
Long-Run Equilibrium 212 Productive Efficiency 274
Changes in Technology 213 Allocative Efficiency 276
Declining Industries 215 Which Market Structures Are
Summary 216 Efficient? 277
Key Concepts 217 Allocative Efficiency and Total
Study Exercises 217 Surplus 279
Allocative Efficiency and Market
Chapter 10 Monopoly, Cartels, and Price
Failure 282
Discrimination 221
12.2 Economic Regulation to Promote
10.1 A Single-Price Monopolist 222
Efficiency 283
Revenue Concepts for a Monopolist 222
Regulation of Natural Monopolies 284
Short-Run Profit Maximization 225
Regulation of Oligopolies 287
Why Are Monopolies Rare? 227
12.3 Canadian Competition Policy 289
Entry Barriers 227
The Canadian Competition Act
The Very Long Run and Creative
of 1986 289
Destruction 229
The Reforms of 2009 292
10.2 Cartels and Monopoly Power 230
Future Challenges 293
The Effects of Cartelization 232
Summary 294
Problems That Cartels Face 232
Key Concepts 294
10.3 Price Discrimination 235
Study Exercises 295
When Is Price Discrimination Possible? 236
Different Forms of Price
Discrimination 237 PART 5
The Consequences of Price Factor Markets 299
Discrimination 241 Chapter 13 How Factor Markets Work 299
Summary 243 13.1 The Demand for Factors 300
Key Concepts 243 Marginal Revenue Product 300
Study Exercises 244 The Firm’s Demand Curve for
a Factor 301
Chapter 11 Imperfect Competition and
The Market Demand Curve for
Strategic Behaviour 248 a Factor 303
11.1 Imperfect Competition 249
13.2 The Supply of Factors 305
Between the Two Extremes 249
The Supply of Factors to the
Defining Imperfect Competition 251
Economy 305
11.2 Monopolistic Competition 253
The Supply of Factors to a
The Assumptions of Monopolistic
Particular Industry 307
Competition 254
The Supply of Factors to a
Predictions of the Theory 254
Particular Firm 309
11.3 Oligopoly and Game Theory 256
13.3 Factor Markets in Action 310
Profit Maximization Is Complicated 256
Differentials in Factor Prices 311
The Basic Dilemma of Oligopoly 257
Economic Rent 314
Some Simple Game Theory 258
A Final Word 318
Extensions in Game Theory 260
Summary 319
11.4 Oligopoly in Practice 261
Key Concepts 320
Cooperative Behaviour 261
Study Exercises 320
Competitive Behaviour 262
The Importance of Entry Barriers 263 Chapter 14 Labour Markets and Income
Oligopoly and the Economy 265 Inequality 324
Summary 267 14.1 Wage Differentials 326
Key Concepts 268 Wage Differentials in Competitive
Study Exercises 268 Labour Markets 326
 CONTENTS vii

Wage Differentials in Non-competitive Non-Rivalrous and Non-Excludable

Labour Markets 330 Goods 386
Legislated Minimum Wages 333 Asymmetric Information 390
14.2 Labour Unions 335 Summary 391
Collective Bargaining 336 16.4 Broader Social Goals 393
14.3 Income Inequality 339 Income Distribution 393
Measuring Income Inequality 339 Preferences for Public Provision 394
Causes of Rising Income Inequality 343 Protecting Individuals from Others 395
Policy Implications 346 Paternalism 395
Summary 349 Social Responsibility 396
Key Concepts 349 A General Principle 396
Study Exercises 349 16.5 Government Intervention 396
The Tools of Government
Chapter 15 Interest Rates and the Capital Intervention 397
Market 354 The Costs of Government
15.1 A Brief Overview of the Capital Intervention 398
Market 355 Government Failure 399
15.2 Present Value 356 How Much Should Government
The Present Value of a Single Intervene? 401
Future Sum 357 Summary 402
The Present Value of a Stream of Key Concepts 403
Future Sums 359 Study Exercises 403
Summary 359
15.3 The Demand for Capital 361 Chapter 17 The Economics of Environmental
The Firm’s Demand for Capital 361 Protection 407
The Economy’s Demand for 17.1 The Economic Rationale for
Investment 365 Reducing Pollution 408
15.4 The Supply of Capital 365 Pollution as an Externality 408
Households’ Supply of Saving 365 The Optimal Amount of Pollution
The Economy’s Supply of Saving 367 Abatement 409
15.5 Equilibrium in the Capital Market 367 17.2 Pollution-Reduction Policies 411
The Equilibrium Interest Rate 367 Direct Regulatory Controls 411
Changes in the Market Equilibrium 368 Emissions Taxes 413
Long-Run Trends in the Capital Tradable Pollution Permits: “Cap
Market 371 and Trade” 415
Summary 373 Pricing Pollution 417
Key Concepts 374 17.3 The Challenge of Global Climate
Study Exercises 374 Change 418
Greenhouse-Gas Emissions 418
The Case for Global Collective
PART 6 Action 420
Government in the Market Economy 377 Energy Use, GDP, and
Greenhouse-Gas Emissions 422
Chapter 16 Market Failures and Government
Significant Policy Challenges 425
Intervention 377 Summary 427
16.1 Basic Functions of Government 378 Summary 428
16.2 The Case for Free Markets 379 Key Concepts 429
Automatic Coordination 380 Study Exercises 429
Innovation and Growth 381
Decentralization of Power 382 Chapter 18 Taxation and Public Expenditure 434
16.3 Market Failures 382 18.1 Taxation in Canada 435
Market Power 383 Progressive Taxes 435
Externalities 383 The Canadian Tax System 436
 viii CONTENTS

18.2 Evaluating the Tax System 440 Summary 824

Taxation and Equity 440 Key Concepts 824
Taxation and Efficiency 442 Study Exercises 825
18.3 Public Expenditure in Canada 445
Chapter 33 Trade Policy 828
Government Purchases and Transfers 446
33.1 Free Trade or Protection? 829
Canadian “Fiscal Federalism” 446
The Case for Free Trade 829
Canadian Social Programs 449
The Case for Protection 830
18.4 Evaluating the Role of Government 454
Invalid Arguments for Protection 833
Public Versus Private Sector 455
33.2 Methods of Protection 836
Scope of Government Activity 455
Tariffs 837
Evolution of Policy 456
Import Quotas 839
Summary 456
Tariffs Versus Quotas: An
Key Concepts 457
Application 839
Study Exercises 457
Trade-Remedy Laws and
Non-Tariff Barriers 840
PART 12 33.3 Current Trade Policy 842
Canada in the Global Economy 803 The GATT and the WTO 842
Regional Trade Agreements 842
Chapter 32 The Gains from International Trade 803 Trade Creation and Trade Diversion 843
32.1 The Gains from Trade 804
The North American Free Trade
Interpersonal, Interregional, and
Agreement 844
International Trade 805
Summary 848
Illustrating the Gains from Trade 806
Key Concepts 849
The Gains from Trade with
Study Exercises 849
Variable Costs 811
Sources of Comparative Advantage 814
Mathematical Notes M-1
32.2 The Determination of Trade Patterns 816
Timeline of Great Economists T-1
The Law of One Price 817
Index I-1
The Pattern of Foreign Trade 818
Is Comparative Advantage Obsolete? 819
The Terms of Trade 821
List of Boxes

Applying Economic Concepts

1-1 The Opportunity Cost of Your University 10-1 Network Effects as Entry Barriers 228
Degree 6 12-1 Are Google and Facebook the Standard
2-1 Where Economists Work 29 Oil of the Twenty-First Century? 290
3-1 Why Apples but Not iPhones? 63 14-1 The Rise of the “Gig” Economy 346
5-1 Minimum Wages and Unemployment 100 15-1 Inflation and Interest Rates 369
6-1 Rationality, Nudges, and Behavioural 16-1 The World’s Endangered Fish 388
Economics 122 16-2 Used Cars and the Market for “Lemons” 392
7-1 Is It Socially Responsible to Maximize 18-1 Poverty Traps and the Negative
Profits? 152 Income Tax 453
7-2 Three Examples of Diminishing Returns 160 32-1 Two Examples of Absolute and
7-3 The Digital World: When Diminishing Comparative Advantage 812
Returns Disappear Altogether 166 32-2 Comparative Advantage and Global
8-1 The Significance of Productivity Growth 183 Supply Chains 820
9-1 Why Small Firms Are Price Takers 199 33-1 Canadian Wine: A Free-Trade
9-2 The Parable of the Seaside Inn 209 Success Story 847

Lessons from History

4-1 Economic Development and Income 13-1 David Ricardo and “Economic Rent” 316
Elasticities 90 33-1 Donald Trump, Tariff Wars, and Stark
8-1 Jacob Viner and the Clever Draftsman 181 Lessons from the Great Depression 836
10-1 Disruptive Technologies and Creative
Destruction 231

Extensions in Theory
3-1 The Distinction Between Stocks 18-1 Who Really Pays the Corporate
and Flows 51 Income Tax? 438
11-1 The Prisoners’ Dilemma 260 32-1 The Gains from Trade More Generally 810
16-1 Arthur Okun’s “Leaky Bucket” 394

ix
To the Instructor

Economics is a living discipline, changing and evolving Living Standards and Economic Growth
in response to developments in the world economy and
in response to the research of many thousands of econo- One of the most fundamental economic issues is the
mists throughout the world. Through sixteen editions, determination of overall living standards. Adam Smith
Microeconomics has evolved with the discipline. Our wondered why some countries become wealthy while
purpose in this edition, as in the previous fifteen, is to others remain poor. Though we have learned much about
provide students with an introduction to the major issues this topic in the 240 years since Adam Smith’s landmark
facing the world’s economies, to the methods that econ- work, economists recognize that there is still much we
omists use to study those issues, and to the policy prob- do not know.
lems that those issues create. Our treatment is everywhere The importance of technological change in deter-
guided by three important principles: mining increases in overall living standards is a theme
that permeates both the microeconomics and macroeco-
1. Economics is scientific, in the sense that it progresses nomics halves of this book. Chapter 8 explores how
through the systematic confrontation of theory by firms deal with technological change at the micro level,
evidence. Neither theory nor data alone can tell us and how changes in their economic environment lead
much about the world, but combined they tell us a them to create new products and new production
great deal. ­processes. Chapters 11 and 12 discuss how imperfectly
competitive firms often compete through their innovative
2. Economics is relevant, and it should be seen by stu- practices, and the importance for policymakers of
dents to be so. An understanding of economic theory designing competition policy to keep these practices as
combined with knowledge about the economy pro- energetic as possible.
duces many important insights about economic We are convinced that no other introductory eco-
policy. Although we stress these insights, we are also nomics textbook places as much emphasis on techno-
careful to point out cases in which too little is known logical change and economic growth as we do in this
to support strong statements about public policy. book. Given the importance of continuing growth in liv-
Appreciating what is not known is as important as ing standards and understanding where that growth
learning what is known. comes from, we believe this emphasis is appropriate. We
hope you agree.
3. We strive always to be honest with our readers.
Although we know that economics is not always
easy, we do not approve of glossing over difficult Financial Crisis, Recession, and Recovery
bits of analysis without letting readers see what is
happening and what has been assumed. We take The collapse of U.S. housing prices in 2007 led to a
whatever space is needed to explain why economists global financial crisis the likes of which had not been
draw their conclusions, rather than just asserting the witnessed in a century, and perhaps longer. A deep reces-
conclusions. We also take pains to avoid simplifying sion, experienced in many countries, followed quickly on
matters so much that students would have to unlearn its heels. These dramatic events reawakened many people
what they have been taught if they continue their to two essential facts about economics. First, modern
study beyond the introductory course. In short, we economies can and do go into recession. This essential
have tried to follow Albert Einstein’s advice: fact had perhaps been forgotten by many who had
become complacent after more than two decades of eco-
Everything should be made as simple as possible, nomic prosperity. Second, financial markets are crucial
but not simpler. to the operation of modern economies. Like an electricity
system, the details of financial markets are a mystery to
most people, and the system itself is often ignored when
CURRENT ECONOMIC ISSUES it is functioning properly. But when financial markets
cease to work smoothly and interest rates rise while
In writing the sixteenth edition of Microeconomics, we credit flows decline, we are all reminded of their impor-
have tried to reflect the major economic issues that we tance. In this sense, the financial crisis of 2007–2008 was
face in the early twenty-first century. like a global power failure for the world economy.

x
 TO THE INSTRUCTOR xi

The financial crisis had micro causes and macro as often as possible. Here are but a few of the many
c­ onsequences. The challenges of appropriate regulation examples that we explore:
for financial and nonfinancial firms are explored in
• tax incidence (in Chapter 4)
Chapters 12 and 16. The market for financial capital and
• the effects of minimum wages and rent controls (in
the determination of interest rates are examined in
Chapter 5)
Chapter 15. And debates regarding the appropriate role
• economic regulation and competition policy (in Chap-
of the government in a market economy occur through-
ter 12)
out the book, including in Chapters 1, 5, 16, 17, and 18.
• pay equity policy (in Chapter 13)
• environmental policies (in Chapter 17)
Globalization • the design of governments’ taxation and expenditure
systems (in Chapter 18)
Enormous changes have occurred throughout the world
over the last few decades. Flows of trade and investment
between countries have risen so dramatically that it is
now common to speak of the “globalization” of the THE BOOK
world economy. Today it is no longer possible to study
any economy without taking into account developments Economic growth, financial crisis and recession, global-
in the rest of the world. ization, and the role of government are pressing issues of
Throughout its history, Canada has been a trading the day. Much of our study of economic principles and
nation, and our policies relating to international trade the Canadian economy has been shaped by these issues.
have often been at the centre of political debates. In addition to specific coverage of growth and interna-
International trade shows up in many parts of this text- tionally oriented topics, growth and globalization appear
book, but it is the exclusive focus of two chapters. naturally throughout the book in the treatment of many
Chapter 32 discusses the theory of the gains from trade; topics once thought to be entirely “domestic.”
Chapter 33 explores trade policy, with an emphasis on Most chapters of Microeconomics contain some dis-
NAFTA and the WTO. cussion of economic policy. We have two main goals in
The forces of globalization are with us to stay. In mind when we present these discussions:
this sixteenth edition of Microeconomics, we have done
our best to ensure that students are made aware of the 1. We aim to give students practice in using economic
world outside Canada and how events elsewhere in the theory, because applying theory is both a wonder-
world affect the Canadian economy. fully effective teaching method and a reliable test of
students’ grasp of theory.

The Role of Government 2. We want to introduce students to the major policy

issues of the day and to let them discover that few
Between 1980 and 2008, the political winds shifted in policy debates are as “black and white” as they
Canada, the United States, and many other countries. often appear in the press.
Political parties that previously advocated a greater role
for government in the economy argued the benefits of Both goals reflect our view that students should see eco-
limited government. But the political winds shifted again nomics as relevant and useful in helping us to understand
with the arrival of the financial crisis and global reces- and deal with the world around us.
sion in 2008, which led governments the world over to
take some unprecedented actions. Many soon argued
that we were observing the “end of laissez-faire” and Structure and Coverage
witnessing the return of “big government.” But was that
really true? To open Part 1, Chapter 1 begins with an informal pre-
Has the fundamental role of government changed sentation of six major issues of the day. We then intro-
significantly over the past 35 years? In order to under- duce scarcity and choice, and this leads to a discussion
stand the role of government in the economy, students of the market as a coordinating device. Finally, we turn
must understand the benefits of free markets as well as to alternative economic systems. Comparisons with com-
the situations that cause markets to fail. They must also mand economies help to establish what a market econ-
understand that governments often intervene in the econ- omy is by showing what it is not. Chapter 2 makes the
omy for reasons related more to equity than to efficiency. important distinction between positive and normative
In this sixteenth edition of Microeconomics, we con- inquiries and goes on to an introductory discussion of
tinue to incorporate the discussion of government policy the construction and testing of economic theories.
 xii TO THE INSTRUCTOR

Part 2 deals with demand and supply. After intro- We hope you find this menu both attractive and chal-
ducing price determination and elasticity in Chapters 3 lenging; we hope students find the material stimulating
and 4, we apply these tools in Chapter 5. The case stud- and enlightening. Many of the messages of economics are
ies are designed to provide practice in applying the tools complex—if economic understanding were only a matter
rather than to give full coverage of each case presented. of common sense and simple observation, there would be
Chapter 5 also has an intuitive and thorough treatment no need for professional economists and no need for text-
of economic value and market efficiency. books like this one. To understand economics, one must
Part 3 presents the foundations of demand and work hard. Working at this book should help readers gain
­supply. The theory of consumer behaviour is developed a better understanding of the world around them and of
via marginal utility theory in Chapter 6, which also pro- the policy problems faced by all levels of government.
vides an introduction to consumer surplus and an intui- Furthermore, in today’s globalized world, the return to
tive discussion of income and substitution effects. The education is large. We like to think that we have contrib-
Appendix to Chapter 6 covers indifference curves, bud- uted in some small part to the understanding that increased
get lines, and the derivation of demand curves using investment in human capital by the next generation is nec-
indifference theory. Chapter 7 introduces the firm as an essary to restore incomes to the rapid growth paths that
institution and develops short-run costs. Chapter 8 cov- so benefited our parents and our peers. Perhaps we may
ers long-run costs and the principle of substitution and even contribute to some income-enhancing accumulation
goes on to consider shifts in cost curves due to techno- of human capital by some of our readers.
logical change. The latter topic is seldom if ever covered
in the micro part of elementary textbooks, yet applied
work on firms’ responses to changing economic signals SUBSTANTIVE CHANGES
shows it to be extremely important.
The first two chapters of Part 4, Chapters 9 and 10, TO THIS EDITION
present the standard theories of perfect competition and
We have revised and updated the entire text with guid-
monopoly with a thorough discussion of price discrimi-
ance from feedback from both users and nonusers of the
nation and some treatment of international cartels.
previous editions of this book. We have striven very hard
Chapter 11 deals with monopolistic competition and oli-
to improve the teachability and readability of the book.
gopoly, which are the market structures most commonly
We have focused the discussions so that each major point
found in Canadian industries. Strategic behaviour plays
is emphasized as clearly as possible, without distracting
a central part in the analysis of this chapter. The first half
the reader with nonessential points. As in recent editions,
of Chapter 12 deals with the efficiency of competition
we have kept all core material in the main part of the
and the inefficiency of monopoly. The last half of the
text. Three types of boxes (Applying Economic Concepts,
chapter deals with regulation and competition policy.
Lessons from History, and Extensions in Theory) are
Part 5 begins with Chapter 13, which discusses the
used to show examples or extensions that can be skipped
general principles of factor pricing and how factor prices
without fear of missing an essential concept. But we
are influenced by factor mobility. Chapter 14 then exam-
think it would be a shame to skip too many of them, as
ines the operation of labour markets, addressing issues
there are many interesting examples and policy discus-
such as wage differentials, discrimination, labour unions,
sions in these boxes.
and the current trend of rising income inequality.
What follows is a brief listing of the main changes
Chapter 15 discusses investment in physical capital, the
that we have made to the textbook.
role of the interest rate, and the overall functioning of
capital markets. Part 1: What Is Economics?
The first chapter of Part 6 (Chapter 16) provides a In Chapter 1, we have added accelerating technological
general discussion of market success and market failure change and rising protectionism to the initial list of eco-
and outlines the arguments for and against government nomic challenges. We have also rewritten the simple
intervention in a market economy. Chapter 17 deals with example of the choice between two products; we now
environmental regulation, with a detailed discussion of use a city planner with a fixed budget, choosing between
market-based policies and an introduction to the issue of repairing roads and building new bike paths. We have
global climate change. Chapter 18 analyzes taxes, public improved the discussion of how marginal benefits and
expenditure, and the main elements of Canadian social marginal costs are used to make decisions.
policy. These three chapters expand on the basics of
microeconomic analysis by providing current illustra- Part 2: An Introduction to Demand and Supply
tions of the relevance of economic theory to contempo- In Chapter 3, we have rewritten the discussion of some
rary policy situations. of the shifters of demand curves, and have added changes
 TO THE INSTRUCTOR xiii

in weather as one important factor shifting supply dollar amounts required to be part of “the 1 percent.” In
curves. In our discussion of elasticity in Chapter 4, we our list of possible causes of rising income inequality, we
have clarified the explanation of the calculations have added the phenomenon of the “gig economy,” and
involved. When explaining the determinants of elasticity, this leads to a large new box on its importance, why it is
we have added a discussion of the importance of the item occurring, and the implications for public policy.
in the consumer’s overall budget. In Chapter 5, we have
updated the discussion of rent controls and clarified the Part 6: Government in the Market Economy
discussions of value and cost in our first foray into mar- In Chapter 16, we have changed the way we explain and
ket efficiency. illustrate externalities. Rather than doing it only on the
“cost side,” we now talk about negative externalities as
Part 3: Consumers and Producers events that have external costs and positive externalities as
In Chapter 6, we have added a new box on rationality, things that generate external benefits; as a result, our basic
nudges, and behavioural economics, following from our figure on externalities has been modified. In Chapter 17, we
in-text discussion of whether traditional consumer the- have clarified and updated the discussion of both the inter-
ory is realistic. When covering the theory of the firm in national negotiation process and the various pricing policies
Chapter 7, we used three applications of a single exam- used in Canada to address climate change. Chapter 18 has
ple to illustrate the different “runs” for micro analysis. been fully updated with the new tax and social policies
introduced by the new federal government.
Part 4: Market Structure and Efficiency
In our examination of entry barriers in Chapter 10, we
Part 12: Canada in the Global Economy
have added a discussion of network effects, common to We address the gains from international trade in
digital platforms such as Facebook, Twitter, and eBay. Chapter 32. We have clarified the discussions of the deter-
This leads to a new box on the topic. In our coverage of mination of exports and imports in a competitive market.
oligopoly in Chapter 11, we have improved the two dia- In Chapter 33 on trade policy, the views and policy actions
grams illustrating the prisoners’ dilemma, and added the of U.S. President Trump now figure prominently in several
recent example of price fixing by Canadian grocery places. In our discussion of how protection might improve
stores as an example of explicit collusion. When address- a country’s terms of trade, we have added the example of
ing efficiency in Chapter 12, we have rewritten our dis- Chinese tariffs on imported automobiles; we also use
cussion of allocative efficiency and the production China as an example of a country that uses the “infant
possibilities boundary. In our discussion of the regula- industry” argument for some trade protection. When dis-
tion of oligopolies, we have added a new discussion of cussing “tariff wars,” we now discuss President Trump’s
the current concerns regarding rising corporate concen- new tariffs on steel and aluminum. This leads to a box on
tration, relating back to the network effects we intro- tariff wars in history, which has been expanded to include
duced in Chapter 10. This leads to a new box on whether a discussion of recent U.S. trade policy. The discussion of
Google and Facebook might become the Standard Oil of NAFTA has been updated, and we have added a discus-
the twenty-first century, recalling the history of the rob- sion about the importance of integrated supply chains
ber barons of the late nineteenth century. In our discus- between the three NAFTA countries, especially in the auto
sion of the future of Canadian competition policy, we sector. This leads to a new section examining the current
have added firms’ access to consumer data as an impor- political threat to NAFTA from the U.S. administration.
tant and evolving challenge.
***
Part 5: Factor Markets
If you are moved to write to us (and we hope that
In our discussion of labour markets in Chapter 14, we have
you will be!), please do. You can send any comments or
clarified the explanation of how a monopsony employer
questions regarding the text (or any of the supplemen-
influences the outcome for wages and ­employment. We
tary material, such as the Instructor’s Manual, the
have also rewritten the explanation of the effect of a mini-
TestGen, or the web-based MyLab Economics to:
mum wage in the presence of monopsony firms. In the
discussion of income inequality, we have added material
[email protected]
on the changing income shares and also on the absolute
To the Student

Welcome to what is most likely your first book about the chapter. These will be excellent preparation for your
economics! You are about to encounter what is for most exams. To provide you with immediate feedback, we
people a new way of thinking, which often causes people have posted Solutions to Selected Study Exercises on
to see things differently than they did before. But learn- MyLab Economics (www.pearson.com/mylab). We
ing a new way of thinking is not always easy, and you strongly advise that you should seek to understand eco-
should expect some hard work ahead. We do our best to nomics, not to memorize it.
be as clear and logical as possible and to illustrate our The red numbers in square brackets in the text refer
arguments whenever possible with current and interest- to a series of mathematical notes that are found starting
ing examples. on page M-1 at the end of the book. For those of you
You must develop your own technique for studying, who like mathematics or prefer mathematical argument
but the following suggestions may prove helpful. Begin to verbal or geometric exposition, these may prove
by carefully considering the Learning Objectives at the ­useful. Others may disregard them.
beginning of a chapter. Read the chapter itself relatively In this edition of the book, we have incorporated
quickly in order to get the general idea of the argument. many elements to help you review material and prepare
At this first reading, you may want to skip the boxes and for examinations.
any footnotes. Then, after reading the Summary and the We encourage you to make use of MyLab Economics
Key Concepts (at the end of each chapter), reread the that accompanies this book (www.pearson.com/mylab)
chapter more slowly, making sure that you understand at the outset of your studies. MyLab Economics contains
each step of the argument. a wealth of valuable resources to help you. MyLab
With respect to the figures and tables, be sure you Economics provides Solutions to Selected Study
understand how the conclusions that are stated in bold- Exercises. It also includes many additional practice ques-
face at the beginning of each caption have been reached. tions, some of which are modelled on Study Exercises in
You should be prepared to spend time on difficult sec- the book. You can also find an electronic version of the
tions; occasionally, you may spend an hour on only a few textbook.
pages. Paper and pencil are indispensable equipment in Over the years, the book has benefited greatly from
your reading. It is best to follow a difficult argument by comments and suggestions we have received from
building your own diagram while the argument unfolds ­students. Please feel free to send your comments to
rather than by relying on the finished diagram as it ­[email protected]. Good luck, and we hope
appears in the book. you enjoy your course in economics!
The end-of-chapter Study Exercises require you to
practise using some of the concepts that you learned in

xiv
Acknowledgements
It would be impossible to acknowledge here by name all and enthusiasm in guiding this book through the publica-
the teachers, colleagues, and students who contributed tion and marketing processes. We would also like to
to the development and improvement of this book over thank the many sales representatives who work to bring
its previous fifteen editions. Hundreds of users have writ- this book to professors across the country. These indi-
ten to us with specific suggestions, and much of the viduals have been a pleasure to work with each step along
credit for the improvement of the book over the years the way, and we are deeply grateful for their presence and
belongs to them. We can no longer list them individually their participation and are delighted to consider them
but we thank them all sincerely. friends as well as professional ­colleagues.
For the development of this sixteenth edition, we are Our thanks also to the many people at Pearson with
grateful to the many people who offered informal sug- whom we work less closely but who nonetheless toil
gestions. We would also like to thank the following behind the scenes to produce this book, including Andrea
instructors who provided us with formal reviews of the Falkenberg, Pippa Kennard, Leanne Rancourt, and
textbook. Their observations and recommendations Anthony Leung.
were extremely helpful. Thanks also to Cat Haggert for copyediting, and to
Leanne Rancourt for proofreading, both of which
• Medoune Seck, CEGEP John Abbott College
­provided an invaluable service with their attention to
• Paul T. Dickinson, McGill University
detail.
• Mark Raymond, Saint Mary’s University
In short, we realize that there is a great deal more
• Cheryl Jenkins, John Abbott College
involved in producing a book than just the writing.
• Kevin Richter, Douglas College
Without the efforts of all of these dedicated profession-
• Fulton Tom, Langara College
als, this textbook simply would not exist. Our sincere
• Mayssun El-Attar Vilalta, McGill University
thanks to all of you.
• Michael Barber, Queen’s University
Thanks also to James Ryan for his detailed and dili-
• Michael Batu, University of Windsor
gent work in assembling the necessary data for updating
• Catherine Boulatoff, Dalhousie University
this sixteenth edition.
• Suzanna Fromm, BCIT
Finally, Ingrid Kristjanson and I have been partners
• Cheryl Roberts, Vancouver School of Economics and
in life for over 30 years and partners in this textbook
Vantage College
venture since we began work on the 9th edition in 1995.
• Sinisa Vujovic, Kwantlen Polytechnic University
Without her participation, the quality and efficiency of
We would like to express our thanks to the many this project would suffer greatly. Ingrid also plays a lead-
people at Pearson Canada involved in the development ing role in the improvement, rewriting, and expansion of
and production of this textbook. We would especially like the electronic Testbank. With her involvement, the
to thank three individuals with whom we worked closely. lengthy revision of the textbook and its supplements con-
Kimberley Veevers (Executive Portfolio Manager); Toni tinues to be an enriching and pleasant experience.
Chahley (Content Developer); Spencer Snell (Marketing
Manager) all showed their professionalism, dedication, Christopher Ragan

xv
About the Author
Chris Ragan received Policy (MPP) program as well as the many other research
his B.A. in economics and outreach elements included in leading policy schools.
from the University of Professor Ragan’s research focuses mainly on the
Victoria, his M.A. from design and implementation of macroeconomic policy in
Queen’s University, and Canada. He has been privileged to serve the federal gov-
his Ph.D. from the Mas­ ernment in Ottawa as Special Advisor to the Governor of
sachusetts Institute of the Bank of Canada, the Clifford Clark Visiting Economist
Technology in Cam­ at the Department of Finance, and most recently as a
bridge, Massachusetts, member of the Advisory Council on Economic Growth.
in 1990. He then joined He currently serves as the chair of Canada’s Ecofiscal
the Department of Economics at McGill University in Commission, a five-year project of independent econo-
Montreal, where he has taught graduate courses in mac- mists and advisors to promote the greater use of pollution
roeconomics and international finance and undergradu- pricing in the Canadian economy.
ate courses in macroeconomic theory and policy, current Chris Ragan used the third edition of this textbook
economic issues, and financial crises. Over the years he as an undergraduate student in 1981 and joined Richard
has taught principles of economics (micro and macro) to Lipsey as a co-author in 1997 for the book’s ninth
thousands of students at McGill and maintains a reputa- ­edition. For several editions, Lipsey and Ragan worked
tion on campus as being “super-excited” about econom- diligently to maintain the book’s reputation as the clear-
ics. In 2007, Chris Ragan was awarded the Noel est and most comprehensive introductory economics
Fieldhouse Teaching Award from McGill for teaching textbook in Canada. Although Chris Ragan is now the
excellence. sole listed author, this sixteenth edition still owes much
In 2017, he was appointed as the inaugural Director to the dedication of previous authors, including Richard
of McGill’s Max Bell School of Public Policy. In that Lipsey, Douglas Purvis, and Gordon Sparks.
capacity, he will be designing a new Master of Public

xvi
 1
PART 1: WHAT IS ECONOMICS?

Economic Issues and

Concepts

CHAPTER OUTLINE LEARNING OBJECTIVES (LO)

After studying this chapter you will be able to
1.1 WHAT IS ECONOMICS? 1 explain the importance of scarcity, choice, and opportunity cost, and how
each is illustrated by the production possibilities boundary.

1.2 T
 HE COMPLEXITY OF 2 view the market economy as self-organizing in the sense that order emerges
MODERN ECONOMIES from a large number of decentralized decisions.

1.3 IS THERE AN ALTERNATIVE 3 explain how specialization gives rise to the need for trade, and how trade is
TO THE MARKET ECONOMY? facilitated by money.
4 explain the importance of maximizing and marginal decisions.
5 describe how all actual economies are mixed economies, having elements
of free markets, tradition, and government intervention.

MANY of the challenges we face in Canada and population aging in Canada and other developed coun-
around the world are primarily economic. Others that tries will have consequences for the structure of our soci-
appear to be mainly environmental, social, or political eties, but it will also have significant economic effects;
usually have a significant economic dimension. Wars and and the existence of poverty, whether in Canada or in
civil unrest throughout history have often had economic the much poorer nations of the world, most certainly has
roots, with antagonists competing for control over vital economic causes and consequences. We begin by discuss-
resources; global climate change is a phenomenon that ing several issues that are currently of pressing concern,
engages the attention of the scientific and environmental both inside and outside of Canada. Then, we’ll move on
communities, but the economic implications of both the to acquiring the knowledge and tools we need to better
problem and its solutions will be tremendous; understand these and many other issues.

1
2 P A R T 1 : W H AT I S E C O N O M I C S ?

Productivity Growth Productivity growth lies at the heart of the long-term increase in
average living standards. Productivity is a measure of how much output (or income) is
produced by one hour of work effort, and it has been rising gradually over the past
century. In recent years, however, productivity growth has been slowing in Canada,
and economists have been examining the cause of the slowdown and also examining
what policies, if any, might reverse this trend. If your living standards are to improve
over your lifetime as much as your grandparents’ did over theirs, Canada’s rate of pro-
ductivity growth will need to increase significantly.

Population Aging The average age of the Canadian population is steadily rising, due
both to a long-term decline in fertility and to an increase in average life-expectancy.
This population aging has two important economic effects. First, since people eventu-
ally retire as they approach their “golden years,” there will be a decline in the growth
rate of Canada’s labour force. As a result, some firms and industries will find it more
difficult to find workers, and wages will likely rise. Second, since our publicly funded
healthcare system tends to spend much more on seniors than it does on younger Can-
adians, there will be a significant increase in public health-care spending that will put
difficult demands on governments’ fiscal positions. This same demographic problem is
being encountered in most developed countries.

Climate Change Climate change is a global phenomenon that has important implica-
tions for most nations on Earth. The long-term increase in the emission of greenhouse
gases—caused largely from the burning of fossil fuels such as oil, coal, and natural
gas—has led to an accumulation of these gases in the atmosphere and is contributing
to a long-term increase in Earth’s average temperature. The rise in temperature is lead-
ing to the melting of polar ice caps, a slow increase in sea level, a creeping expansion
of the world’s great deserts, reductions in agricultural productivity, and significant
changes in global weather patterns—including a greater frequency of extreme events
such as floods, droughts, and hurricanes. Global climate change presents a challenge
for the design of better economic policy, aimed at reducing greenhouse-gas emissions
without unduly slowing the growth of material living standards. Climate change also
presents a long-term challenge as to how we will adapt to the changes that are already
happening.

Accelerating Technological Change Over the past half century, the digitization of
information has created revolutionary changes in technology, from the evolution of
hand-held computers with enormous capabilities to the development of artificial intel-
ligence whereby machines are able to learn. Nanotechnology and 3D printing are just
two examples that are likely to lead to products and services we can barely imagine
today. Such technological change is an important driver of our long-run prosperity—
but it also creates enormous disruptions in product markets and labour markets. Some
businesses will find it difficult to compete against rivals with more advanced technol-
ogy and will be forced to adapt or go out of business. Some workers may find their jobs
replaced by machines and will be forced to retrain to find acceptable employment,
perhaps in another city or province. Such “disruptive technologies” also create chal-
lenges for government policy: How can we reap the benefits of these new developments
while ensuring that our citizens continue to have satisfying work at thriving
businesses?
 C H A P T E R 1 : E c o n o m i c I s s u e s a n d C o n cept s 3

Rising Protectionism Canada is a small nation that relies significantly on trade with
the rest of the world for its prosperity. We sell our lumber and oil and beef to the world,
as we do our engineering and legal and financial services. As consumers we buy a wide
variety of products from beyond our borders, including coffee, leather shoes, and fine
wine; our firms also buy many inputs from abroad, including machine tools, software,
and specialized raw materials. In short, international trade has long been crucial to
Canada’s economic prosperity. In recent years, however, many countries have been
becoming more “protectionist” in their policies—meaning that they are less willing to
open their domestic markets to other countries’ products. Past experience across many
countries and over many years has shown that protectionism tends to lead to less inter-
national trade and also less global production and income. Small, trade-reliant coun-
tries like Canada have much to fear from rising protectionism elsewhere.

Growing Income Inequality In Canada and most other developed countries, the
past three decades have seen a rise in income inequality. Particularly dramatic has
been the increase in the share of national income going to the richest 1 percent of
individuals, all while the incomes of those in the “middle classes” have grown very
slowly. The causes of this rising inequality are hotly debated among economists, but
most agree that the nature and pace of technological change and the growing ability
of firms to locate their production facilities in lower-wage developing countries are
contributing factors. There is also considerable debate regarding what government
actions could be taken to slow or reverse the increase in income inequality, and
whether the benefits of those actions in terms of reduced inequality would be justified
by the associated costs.

These six issues are only a small sample of the many economic issues that confront
Canada and other countries. To understand any of them it is necessary to have a basic
understanding of economics—how markets work, how prices are determined, in what
sense markets sometimes fail to work well, and how government policy can be used to
improve outcomes. These are the main topics of this book. There is a lot to learn, and
not many weeks in your college or university course. So, let’s get started at the very
beginning.

1.1 What Is Economics?

The issues described in the introduction would not matter much if we lived in an econ-
omy of such plenty that there was always enough to fully satisfy everyone’s wants. If we
could always get all the things we wanted, it wouldn’t be so important to be more
productive in our work. Rapid growth in health-care spending would not be such a
problem if governments had no limits on what they could spend. And rising protection-
ism would not be so threatening if Canada did not rely on the income earned by selling
our many exported products to other countries. But such an economy with unlimited
products and income is impossible. Why?
The short answer is because we live in a world of scarcity. Compared with the
desires of individuals for things such as better food, clothing, housing, education, clean
water and health care, the existing supplies of resources are clearly inadequate. They
are sufficient to produce only a small fraction of the goods and services that we desire.
 4 P A R T 1 : W H AT I S E C O N O M I C S ?

This scarcity gives rise to the basic economic problem of choice. If we cannot have
everything we want, we must choose what we will and will not have.
One definition of economics comes from the great economist Alfred Marshall
(1842–1924), who we will encounter at several points in this book: “Economics is a
study of mankind in the ordinary business of life.” A more informative definition is:

Economics is the study of the use of scarce resources to satisfy unlimited human
wants.

Scarcity is inevitable and is central to all economies and all economic problems.
What are society’s resources? Why is scarcity inevitable? What are the consequences of
scarcity?

Resources
A society’s resources are often divided into the three broad categories of land, labour,
and capital. Land includes all natural endowments, such as arable land, forests, lakes,
crude oil, and minerals. Labour includes all mental and physical human resources,
including entrepreneurial capacity and management skills. Capital includes all manu-
factured aids to production, such as tools, machinery, and buildings. Economists call
factors of production Resources such resources factors of production because they are used to produce the things that
used to produce goods and people desire. We divide what is produced into goods and services. Goods are tangible
services; frequently divided into
the basic categories of land,
(e.g., cars and shoes), and services are intangible (e.g., legal advice and education).
labour, and capital. People use goods and services to satisfy their wants. The act of making them is called
production, and the act of using them is called consumption.
goods Tangible products, such
as cars or shoes.

services Intangible products, Scarcity and Choice

such as legal services and
education. For almost all of the world’s 7.6 billion people, scarcity is real and ever-present. As we
said earlier, relative to our desires, existing resources are inadequate; there are enough
production The act of making
goods or services.
to produce only a fraction of the goods and services that we want.
But aren’t the developed nations rich enough that scarcity is no longer a problem?
consumption The act of using After all, they are “affluent” societies. Whatever affluence may mean, however, it does
goods or services to satisfy
wants.
not mean the end of the problem of scarcity. Canadian families that earn $75 000 per
year, approximately the median after-tax income for a Canadian family in 2019 but a
princely amount by world standards, have no trouble spending it on things that seem
useful to them, and they would certainly have no trouble convincing you that their
resources are scarce relative to their desires.
Because resources are scarce, all societies face the problem of deciding what to pro-
duce and how much each person will consume. Societies differ in who makes the choices
and how they are made, but the need to choose is common to all. Just as scarcity implies
the need for choice, so choice implies the existence of cost. A decision to have more of
one thing is necessarily a decision to have less of some other thing. The cost of the more
of one thing is the amount of the other thing we must give up in order to get it.

Scarcity implies that choices must be made, and making choices implies the
­existence of costs.
 C H A P T E R 1 : E c o n o m i c I s s u e s a n d C o n cept s 5

Opportunity Cost To see how choice implies cost, we look first at an example of a
single decision maker and then at an example for the country as a whole. Both exam-
ples involve precisely the same fundamental principles.
Consider Susan, a senior planner who works for a small Canadian city. She is allo-
cated a budget of $12 million for the year and must decide how to allocate it between
two activities—repairing existing roads and building new bicycle paths. Repairing
roads costs $1 million per kilometre repaired; new bicycle paths cost $500 000 per
kilometre to build.
The choices that Susan and her planning department face are illustrated in
Figure 1-1. The amount of new bicycle path is shown in kilometres along the horizontal
axis. The kilometres of road repair is shown along the vertical axis. The downward-
sloping line is Susan's budget line—it shows the various combinations of the two activ-
ities that use up the full budget of $12 million. Since it is possible to build fractions of
a kilometre of bicycle path as well as repair fractions of a kilometre of road, all points
along the budget line are attainable combinations of the two activities. Any combina-
tion outside the budget line—such as point a—is unattainable; the total cost of this
combination requires more than the available budget.
In this setting, Susan and her colleagues need to make a difficult decision. How
should the available funds be allocated between the two alternatives? To decide, they
will need to compare the benefits of road repair to the benefits from building new
bicycle paths. But they will also need to think about costs. For this discussion, we will
focus only on the issue of costs.
opportunity cost The value of
What is the cost of an extra kilometre of road repair in this situation? One simple the next best alternative that is
answer is that the cost is $1 million. An alternative and more revealing answer is that the forgone when one alternative
cost of an extra kilometre of road repair is the two kilometres of new bicycle path that is chosen.
must be given up to get it. In fact, in this case we
say that two kilometres of bicycle path is the FIGURE 1-1 Choosing Between Road Repair
opportunity cost of one kilometre of road repair. and New Bicycle Paths

12 Budget line
Kilometres of Road Repair

Every time a choice is made, opportunity

costs are incurred. c a Unattainable
9 combinations
Get 3
extra
kilometres b
6
Opportunity Cost Is a Ratio As simple as it of road Give up 6
may seem, the idea of opportunity cost is one repair kilometres of
3 bicycle path
of the central insights of economics. Here is a
precise definition: The opportunity cost of
choosing any one alternative is the value of 0 3 6 9 12 15 18 21 24
the next best alternative that is given up. That Kilometres of New Bicycle Paths
is, it is the cost measured in terms of other
goods and services that could have been Scarce resources force a choice among competing alternatives.
Given a total budget of $12 million that must be split between
obtained instead. This concept of cost involves
road repair ($1 million per kilometre) and new bicycle paths
a simple ratio, as we can see in our example in ($500 000 per kilometre), some points are unattainable. The
Figure 1-1. Suppose Susan had initially deter- green line is the budget line and shows all of the combinations
mined that the best use of her full budget was of the two alternatives that fully use the budget. The slope of
to choose point b—12 kilometres of new the budget line reflects opportunity costs. The opportunity
cost of one extra kilometre of road repair is two kilometres of
bicycle path and 6 kilometres of road repair.
new bicycle paths. The opportunity cost of 1 kilometre of new
After new information regarding the dire state bicycle path is 0.5 kilometres of road repair.
of some roads is considered, however, the
 6 P A R T 1 : W H AT I S E C O N O M I C S ?

decision is made to choose point c—with more road repair and fewer kilometres of
bicycle path. The movement from point b to point c involves a cost: six kilometres of
bicycle path must be given up in order to get three extra kilometres of road repair.
Each extra kilometre of road repair “costs” two kilometres of new bicycle path
16 , 3 = 22.
Notice that the opportunity costs of the two activities are inverses of one another.
From Figure 1-1 we see that the opportunity cost of one extra kilometre of road repair
is two kilometres of new bicycle path. It is also true that the opportunity cost of one
extra kilometre of bicycle path is 0.5 kilometre of road repair. Note that 0.5 is the slope
of the green budget line.
The concept of opportunity cost is pervasive in economics. Whenever choices are
limited by scarce resources, the decision to have more of one thing implies that we must
give up something else. See Applying Economic Concepts 1-1 for an example of oppor-
tunity cost that should seem quite familiar to you: the opportunity cost of getting a
university degree.

APPLYING ECONOMIC CONCEPTS 1-1

The Opportunity Cost of Your University Degree

The opportunity cost of choosing one thing is what must earnings that you gave up by not taking a job. This
be given up as the best alternative. Computing the oppor- brings the true cost of your university degree—the
tunity cost of a college or university education is a good opportunity cost—up to $132 000.
example to illustrate which factors are included in the Notice that the cost of food, lodging, clothing, and
computation of opportunity cost. You may also be sur- other living expenses did not enter the calculation of the
prised to learn how expensive your university degree opportunity cost in this example. The living expenses
really is!* must be incurred in either case—whether you attend uni-
Suppose that a bachelor’s degree requires four versity or get a job.
years of study and that each year you spend $6500 for If the opportunity cost of a degree is so high, why do
tuition fees—approximately the average at Canadian students choose to go to university? Maybe students sim-
universities in 2019—and a further $1500 per year for ply enjoy learning and are prepared to incur the high cost
books and materials. Does this mean that the cost of a to be in the university environment. Or maybe they
university education is only $32 000? Unfortunately believe that a university degree will significantly increase
not; the true cost of a university degree to a student is their future earning potential. In Chapter 14 we will see
much higher. that this is true. In this case, they are giving up four years
The key point is that the opportunity cost of a uni- of earnings at one salary so that they can invest in build-
versity education does not include just the out-of-pocket ing their skills in the hope of enjoying many more years
expenses on tuition and books. You must also take into in the future at a considerably higher salary.
consideration what you are forced to give up by choosing Whatever the reason for attending college or univer-
to attend university. Of course, if you were not studying sity, the recognition that a post-secondary degree is very
you could have done any one of a number of things, but expensive should convince students to make the best use
the relevant one is the one you would have chosen of their time while they are there. Read on!
instead—your best alternative to attending university.
Suppose your best alternative to attending univer-
sity was to get a job. In this case, the opportunity cost of
your university degree must include the earnings that you *This box considers only the cost to the student of a university
would have received had you taken that job. Suppose degree. For reasons that will be discussed in detail in Part 6 of
your (after-tax) annual earnings would have been this book, provincial governments heavily subsidize post-
$25 000 per year, for a total of $100 000 if you had secondary education in Canada. Because of this subsidy, the
stayed at that job for four years. To the direct expenses of cost to society of a university degree is generally much higher
$32 000, we must therefore add $100 000 for the than the cost to an individual student.
 C H A P T E R 1 : E c o n o m i c I s s u e s a n d C o n cept s 7

The nature of Susan’s planning decision

to allocate a set budget between two activ- FIGURE 1-2 A Production Possibilities Boundary
ities seems relatively straightforward—
although we should not underestimate how
Unattainable
tough such decisions actually are in prac- e combinations
tice. But now consider a bigger problem, a

Quantity of Investment Goods

one where scarcity and choice still play a
Dy Production
central role. Instead of a situation where a b possibilities
single decision maker is allocating dollars of boundary
spending, our next situation relates to how Dx
a country as a whole allocates its scarce f
resources—its land, labour, and capital— d
between the production of various goods
and services. Attainable
combinations
c

Production Possibilities Boundary In par- 0

ticular, consider the choice that any country Quantity of Consumption Goods
must face between producing goods for final
consumption (such as food and clothing) The negatively sloped boundary shows the combinations that are
and goods for investment purposes used to attainable when all resources are used efficiently. The production
possibilities boundary separates the attainable combinations of
increase future production (such as machines
goods, such as a, b, c, and d, from unattainable combinations,
and factories). If resources are fully and effi- such as e and f. Points a, b, and c represent full and efficient use
ciently employed it is not possible to have of society’s resources. Point d represents either inefficient use of
more of both consumption and investment resources or failure to use all the available resources. If produc-
goods. As the country devotes more resour- tion changes from point a to point b, an opportunity cost is
involved. The opportunity cost of producing ∆x more consump-
ces to producing consumption goods it must
tion goods is the necessary reduction in the production of invest-
take resources away from producing invest- ment goods equal to ∆y.
ment goods. The opportunity cost of the
extra consumption goods is the value of the
investment goods forgone.
The choice is illustrated in Figure 1-2. Because resources are scarce, some combina-
tions—those that would require more than the total available supply of resources
for their production—cannot be attained. The negatively sloped curve on the graph
divides the combinations that can be attained from those that cannot. Points above and
to the right of this curve cannot be attained because there are not enough resources,
points below and to the left of the curve can be attained without using all of the avail-
able resources, and points on the curve can be attained only if all the available resour-
ces are used efficiently. The curve is called the production possibilities boundary. production possibilities
(Sometimes “boundary” is replaced with “curve” or “frontier.”) It has a negative slope boundary A curve showing
which alternative combinations
because when all resources are being used efficiently, producing more of one good of output can be attained if all
requires producing less of others. available resources are used
efficiently; it is the boundary
between attainable and
unattainable output
combinations.
A production possibilities boundary illustrates three concepts: scarcity, choice, and
opportunity cost. Scarcity is indicated by the unattainable combinations outside
the boundary; choice, by the need to choose among the alternative attainable points
along the boundary; and opportunity cost, by the negative slope of the boundary.
Another random document with
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 BRICK HORIZONS

Here the old map a woodland marks,

With rivers winding through the hills;
And prints remain of spacious parks,
And gabled farms and watermills.

But now we see no fields to reap,

No flowers to welcome sun and rain:
The hillside is a cinder heap,
The river is an inky drain.

The modern town of red brick streets,

Row beyond row, and shelf on shelf,
On one side spreads until it meets
A town as dreary as itself;
And on the other side its arms
Of road and tramway are out-thrust,
And mutilate the fields and farms,
And shame the woods with noise and dust.

Here, from the scenes we love remote,

Dwell half the toilers of the land,—
The soul we think of as a vote,
The heart we speak of as a hand.

Dull sons of a mechanic age

Who claim but miss the rights of man,—
They have no dreams beyond their cage,
They know not of the haunts of Pan.

Here, wandering through mills and mines

And dreary streets each like the last,
Enclosed by brick horizon lines,
I found an island of the past.
A few sad fields, a few old trees,
In that new world of grime and smoke
Told me the time was springtime; these
Alone remembered and awoke.

And in the grass were stars and bells,

The immemorial blossomings
That spring to greet us from the wells
Of Beauty at the heart of things.

A lark sang overhead, its note

Had the same joy with which it fills
The morning, when we hear it float
Through crystal air on thymy hills.

We mar the earth, our modern toil

Defaces old and lovely things;
We soil the stream, we cannot soil
The brightness of Life’s fountain springs.

Here where man’s last progressive aim

Has stamped the green earth with the brand
Of want and greed, and put to shame
Her beauty, and we see the land

With mine and factory and street

Deformed, and filled with dreary lives,—
Here, too, Life’s fountain springs are sweet:
Our venture fails, God’s hope survives.

And in the heart of every child

Born in this brick horizon ring
The flowers of wonderland grow wild,
The birds of El Dorado sing.
 FIRST PATHWAYS

Where were the pathways that your childhood knew?—

In mountain glens? or by the ocean strands?
Or where, beyond the ripening harvest land,
The distant hills were blue?

Where evening sunlight threw a golden haze

Over a mellow city’s walls and towers?
Or where the fields and lanes were bright with flowers,
In quiet woodland ways?

And whether here or there, or east or west,

That place you dwelt in first was holy ground;
Its shelter was the kindest you have found,
Its pathways were the best.

And even in the city’s smoke and mire

I doubt not that a golden light was shed
On those first paths, and that they also led
To lands of heart’s desire.

And where the children in dark alleys penned,

Heard the caged lark sing of the April hills,
Or where they dammed the muddy gutter rills,
Or made a dog their friend;
Or where they gathered, dancing hand in hand,
About the organ man, for them, too, lay
Beyond the dismal alley’s entrance way,
The gates of wonderland.

For ’tis my faith that Earth’s first words are sweet

To all her children,—never a rebuff;
And that we only saw, where ways were rough,
The flowers about our feet.
 HIDDEN PATHS

You see a house of weathered stone,

A pillared gate, a courtyard wide,
And ancient trees that almost hide
The garden wild and overgrown;
You see the sheltering screen of pines
Beyond the farmyard and the fold,
And upland cornfields waving gold
Against the blue horizon lines;
But we of every field and wall
And room are now so much a part,
We seem to touch a living heart
And rather feel than see it all.

You pass the broken arch that spanned

The garden walk,—you note the weeds,
But miss our secret path that leads
To hidden nooks of wonderland;
And, where the faded rooms you mark,
You know not of the ancient spell
That o’er them in the firelight fell
When all the world outside was dark.

Elsewhere is your enchanted ground,

Your secret path, your treasure store;
And those who sojourned here before
Saw marvels we have never found.
For Earth is full of hidden ways
More wondrous than the ways it shows,
And treasures that outnumber those
For which men labour all their days.
 THE PATHS OF THE INFINITE

Have we not marked Earth’s limits, followed its long ways round,
Charted our island world, and seen how the measureless deep
Sunders it, holds it remote, that still in our hearts we keep
A faith in a path that links our shores with a shore unfound?

No quest the venturer waits, no world have we to explore;

But still the voices that called us far over the lands and seas
Whisper of stranger countries and lonelier deeps than these,
In the wind on the hill, and the reeds on the lake, and the wave on the shore.

Never beyond our Earth shall the venturer find a guide:

From the golden light of the stars, but not from the stars, a clue
May fall to the Earth; and the rose of eve and the noonday blue
Veil with celestial beauty the fathomless deeps they hide.

They have their bounds those deeps, and the ways that end are long;
But the soul seeks not for an end,—its infinite paths are near;
Over its unknown seas by the light of a dream we steer,
Through its enchanted isles we sail on an ancient song.

Here, where a man and a maid in the dusk of the evening meet,
Here, where a grave is green and the larks are singing above,
The secret of life everlasting is held in a name that we love,
And the paths of the infinite gleam through the flowers that grow at our
feet.
 A DESERTED HOME

Here where the fields lie lonely and untended,

Once stood the old house grey among the trees,
Once to the hills rolled the waves of the cornland—
Long waves and golden, softer than the sea’s.

Long, long ago has the ploughshare rusted,

Long has the barn stood roofless and forlorn;
But oh! far away are some who still remember
The songs of the young girls binding up the corn.

Here where the windows shone across the darkness,

Here where the stars once watched above the fold,
Still watch the stars, but the sheepfold is empty;
Falls now the rain where the hearth glowed of old.

Here where the leagues of melancholy loughsedge

Moan in the wind round the grey forsaken shore,
Once waved the corn in the mid-month of autumn,
Once sped the dance when the corn was on the floor.
 BEYOND THE FARTHEST HORIZON

We have dreamed dreams beyond our comprehending,

Visions too beautiful to be untrue;
We have seen mysteries that yield no clue,
And sought our goals on ways that have no ending.
We, creatures of the earth,
The lowly born, the mortal, the foredoomed
To spend our fleeting moments on the spot
Wherein to-morrow we shall be entombed,
And hideously rot,—
We have seen loveliness that shall not pass;
We have beheld immortal destinies;
We have seen Heaven and Hell and joined their strife;
Ay, we whose flesh shall perish as the grass
Have flung the passion of the heart that dies
Into the hope of everlasting life.

Oh, miracle of human sight!

That leaps beyond our earthly prison bars
To wander in the pathways of the stars
Across the lone abysses of the night.
Oh, miracle of thought! that still outsweeps
Our vision, and beyond its range surveys
The vistas of interminable ways,
The chasms of unfathomable deeps,
Renewed forevermore, until at last
The endless and the ended alike seem
Impossible, and all becomes a dream;
And from their crazy watch-tower in the vast
Those wild-winged thoughts again to earth descend
To hide from the unfathomed and unknown,
And seek the shelter love has made our own
On homely paths that in a graveyard end.
Oh, miracles of sight and thought and dream!
Y d b t l d t f th t
You do but lead us to a farther gate,
A higher window in the prison wall
That bounds our mortal state:
However far you lift us we must fall.
But lo! remains the miracle supreme,—
That we, whom Death and Change have shown our fate,
We, the chance progeny of Earth and Time,
Should ask for more than Earth and Time create,
And, goalless and without the strength to climb,
Should dare to climb where we were born to grope;
That we the lowly could conceive the great,
Dream in our dust of destinies sublime,
And link our moments to immortal hope.

No lesson of the brain can teach the soul

That ’twas not born to share
A nobler purpose, a sublimer care
Than those which end in paths without a goal;
No disenchantment turn it from the quest
Of something unfulfilled and unpossessed
O’er which no waters of oblivion roll.
But not in flight of thought beyond the stars
Can we escape our mortal prison bars:
There the unfathomable depths remain
Blind alleys of the brain:
The sources of those sudden gleams of light
That merge our finite in the infinite,
We look for there in vain;
For not upon the pathways that are barred
But those left open,—not where the unknown quest
Dismays the soul, but where it offers rest,
Are set those lights that point us heavenward.

So, let us turn to the unfinished task

That earth demands, strive for one hour to keep
A watch with God, nor watching fall asleep,
Before immortal destinies we ask.
Before we seek to share
A larger purpose, a sublimer care,
Let us o’ercome the bondage of our fears,
And fit ourselves to bear
The burden of our few and sinful years.
Ere we would claim a right to comprehend
The meaning of the life that has no end
Let us be faithful to our passing hours,
And read their beauty, and that light pursue
Which gives the dawn its rose, the noon its blue,
And tells its secret to the wayside flowers.

Our eyes that roam the heavens are too dim,

Our faithless hearts too cumbered with our cares
To reach that light; but whoso sees and dares
To follow, we must also follow him.
Our heroes have beheld it and our seers,
Who in the darkest hours foretold the dawn.
It flashes on the sword for freedom drawn:
It makes a rainbow of a people’s tears.
The vast, the infinite, no more appal
Him who on homely ways has seen it fall:
He trusts the far, he dowers the unknown
With all the love that Earth has made our own,
And all the beauty that his dreams recall:
For him the loneliest deeps of night it cheers;
It gathers in its fold the countless spheres,
And makes a constant homelight for them all.
 A HALT ON THE WAY

A pause, a halt upon the way!

A time for dreaming and recalling;
We bore the burden of the day,
And now the autumn night is falling.

A halt in life! a little while

In which to be but a beholder,
And think not of the coming mile
And feel not, “I am growing older.”

A stern old man with wrinkled brow,

Urging us on with beckoning finger,
Time seems no longer—rather now
A sweetheart who would make us linger.

Old times are with us,—long ago;

Upon the wall familiar shadows;
We find again the haunts we know,
The pleasant pathways through the meadows.

And as we turn and look ahead,

Seeking beyond for things departed,
And dream of pathways we must tread
In days to come through lands uncharted,

Old faiths still light us on our way,

Old love and laughter, hope and sorrow,—
As evening of the Northern day
Becomes the morning of to-morrow.
 OLD LANDMARKS

The log flames, as they leap and fall,

Cast ancient shadows on the wall;
Again I hear the south-west blow
About the house, as long ago
We heard it, when we gathered round
The hearth made homelier by the sound
That in the chimney caverns keened
And told of things the darkness screened.
Dim in their panels round the room
The old unchanging faces loom;
And soft upon the crimson robe,
The hand that rests upon a globe,
The dusky frames, the faded tints,
The flicker of the hearth-light glints.
Out in the yard familiar tones
Of voices reach me; on the stones
A waggon rumbles, and a bark
Welcomes an inmate from the dark.
It might be twenty years ago,
So much of all we used to know
Remains unchanged; and yet I feel
Some want that makes it half unreal.
For we who long ago were part
Of all we knew, the very heart
Of all we loved, let somewhere slip
The bonds of that old comradeship.
The past awakes; but while I muse
Here in the same old scenes, I lose
The paths to which we once had clues.
Along familiar ways we went
All day, at every turn intent
To mark where Time had made a theft,
Or undisturbed our treasure left.
H ld d d h
Here an old tree was down, and there
A roof had fallen, a hearth was bare,
Where once we saw amid the smoke
The glowing turf, the kindly folk.
Here one we had watched beside the plough
Stride with his horses, hobbled now;
And here there strode a full-grown man
Where once a bare-legged urchin ran.
And where was now that girl whose feet
Once made yon mountain path so sweet?
Whose shyness flushed her cheek, the while
The mischief hidden in her smile
Belied it? I behold the spot
Where once she passed but now is not,
The grey rocks, where the mountain breeze
Fluttered the skirts about her knees.
We passed beside the wheelwright’s door
Where, as it used to be, the floor
Was piled with shavings, and a haze
Of dusty motes made dim the rays
Of sunlight, and the air was sweet
With smell of new-sawn wood and peat.
We heard the smithy anvil clink,
And saw the fire grow bright and sink
In answer to the bellows’ wheeze,
While, as of old, between his knees
The smith a horse’s fetlocks drew,
And rasped the hoof and nailed the shoe.
Here, and at every place of call,
The welcome that we had from all,
The pleasant sound of names outgrown
By which in boyhood we were known,
Quick springing to their lips, a look
That backward to old meetings took
Our thoughts, a word that brought to mind
Something for ever left behind,—
All, though they blessed us, touched the springs
Of tears at the deep heart of things.
O tea s at t e deep ea t o t gs.

We saw the mountains far away,

Beyond whose blue horizons lay
The wonderlands of which we dreamed
Of old; and still their barrier seemed
To tell us of the pilgrim quest,
And things remote and unpossessed,—
Not of that world which on our hearts
Had marked its bounds and graved its charts.
They told us of that unknown shore
That none can find; but where, before,
They called us o’er the world to roam,
They now seemed sheltering walls of home.
And those old paths whose ends we sought
Were dearer for themselves than ought
Their ends foretold: no truth could harm
Their beauty or undo their charm;
No disillusions of the far
Could touch their homeliness, or mar
The love that made them what they are.

Here we were children: here in turn

Our children in the same paths learn
The secrets of the woods and flowers,
And dream the dreams that once were ours.
Their vision keen renews our own,
Their certainties our doubts atone,
And, sharing in their joys, we weave
The years we find with those we leave.
A little weary, glad of rest
Ourselves, our hearts are in their quest.
Pilgrims of life, whose steps have slowed,
We love to linger on the road,
Or reach the welcome stage, while they
Are eager for the unknown way.
Some time to come their thoughts will turn
To these wild winter nights, and yearn
For something lost and left behind
For something lost and left behind,
As now I turn.—I hear the wind
Keen in the chimney as of old,
And darkness falls on field and fold;—
I catch the clue, on scenes that were
I look not backward,—I am there!
The men are gone, the gates are barred,
We steal across the empty yard,
The cattle drowse within their stalls,
The shelter of our homestead walls
Is round us, and the ways without
Are filled with mystery and doubt.
Over the hidden forest sweeps
The wind, and all its haunted deeps
Are calling, and we do not dare
Farther beyond our walls to fare
Than o’er one field, the sheds to gain
Where, sheltered from the wind and rain,
The watchful shepherd and his dogs
Still tarry, and a fire of logs,
A lantern’s light, a friendly bark,
Make us an outpost in the dark.
I miss the way! I drop the clues!
Through mists of years again I lose
My childhood, and alone I sit
And watch the shadows leap and flit
Above the hearth. The world that lies
Beyond our homely boundaries
I know, and in the darkness dwell
No hidden foes, no wizard spell.
But still the starry deeps are crossed
By lonelier paths than those we lost;
Still the old wonder and the fear
Of what we know not, makes more dear
The ways we know; and still, no less
Than in my childhood’s days, I bless
The shelter of their homeliness.

A id th b dl d k
Amid the boundless and unknown
Each calls some guarded spot his own;
A shelter from the vast we win
In homely hearths, and make therein
The glow of light, the sound of mirth,
That bind all children of the earth
In brotherhood; and when the rain
Beats loud upon the window-pane,
And shadows of the firelight fall
Across the floor and on the wall,
And all without is wild and lone
On lands and seas and worlds unknown,—
We know that countless hearthlights burn
In darkened places, and discern,
Inwoven with the troubled plan
Of worlds and ways unknown to man,
The shelter at the heart of life,
The refuge beyond doubt and strife,
The rest for every soul outcast,
The homely hidden in the vast;
And doubt not that whatever fate
May lie beyond us, soon or late,
However far afield we roam,
The unknown way will lead us home.

THE END

Printed by R. & R. Clark, Limited, Edinburgh.

By SIDNEY ROYSE LYSAGHT

Crown 8vo. 4s. 6d. net.
POEMS OF THE UNKNOWN WAY
 ATHENÆUM.—“The series of poems under the general heading, ‘The
Undiscovered Shore,’ contains some exquisite renderings of the moods and
impressions of one who goes down, literally as well as tropically, into the
great waters. They are full of melody, full of sadness—the harvest of an eye
quick to catch the beauty of external circumstance and of an ear open to the
calling of the highways of the seas and the highways of life.... Mr. Lysaght
puts an exceptional sense of rhythm at the service of sincere thinking and
fine feeling.”
DAILY CHRONICLE.—“Mr. Lysaght has an admirable style and an
almost Swinburnian command of metre.”
LITERARY WORLD.—“Here is stuff with the right ring; with an accent
such as this to guide him, the critic cannot fall into a mistake. We have
enjoyed our tour among Mr. Lysaght’s perplexities in no half-hearted
fashion.”
Crown 8vo. 6s.
HER MAJESTY’S REBELS
MORNING POST.—“A most remarkable book, and no one on the look-
out for the best in contemporary fiction can afford to miss it.”
WORLD.—“Rare and charming novel.... The story is intensely
interesting, and every individual is alive and appealing.”
ACADEMY.—“To find fault with Her Majesty’s Rebels is difficult, and to
praise it worthily is not easy; few Irish books of such good parts have come
into our hands since Carleton’s days.”
STANDARD.—“The story is tremendously absorbing and poignant.”
SPECTATOR.—“A very striking story.”
DAILY CHRONICLE.—“An able book, certainly one of the ablest of the
year.”
MACMILLAN AND CO., Ltd., LONDON.

By SIDNEY ROYSE LYSAGHT

Crown 8vo. 3s. 6d. each.
ONE OF THE GRENVILLES
 DAILY TELEGRAPH.—“Bound to be discussed by any one who reads it,
and whatever the verdict of the reader may be, he cannot fail to be
interested and attracted.”
GUARDIAN.—“A really good and absorbing tale.”
ACADEMY.—“There is freshness and distinction about One of the
Grenvilles.... Both for its characters and setting and for its author’s pleasant
wit, this is a novel to read.”
BOOKMAN.—“So high above the average of novels that its readers will
want to urge on the writer a more frequent exercise of his powers.”
THE MARPLOT
SPECTATOR.—“A clever, original, and vigorous work.”
WORLD.—“It is not often the path of the reviewer is brightened by so
admirable a piece of work as Mr. Lysaght’s novel, The Marplot.”
PALL MALL GAZETTE.—“A book which the reader cannot put down
without a glow of honest pleasure.... Of very high excellence.”
SATURDAY REVIEW.—“We do not often come across a better specimen
of modern fiction than The Marplot.”
DAILY TELEGRAPH.—“The whole book teems with good things.”
BOOKMAN.—“There is not a dull page in The Marplot.”
MACMILLAN AND CO., Ltd., LONDON.
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