Question 4 (Barriers to Exit The Steel Trapl) If firms incur a cost to exit the market, they may not shut down in the short run even if their revenues do not cover variables costs. The firms stay in operation, at least for a while, so that they can avoid paying the exit costs. For decades, many integrated U.S. steel millsfactories that produce steel from iron orewere operating at losses. Before the 19505, U.S. firms could produce at lower costs than international rivals despite having high wages because their mills were more productive and abundant supplies of coal and iron ore kept their energy and material costs relatively low. In the 19505 and 19605, discoveries of rich iron ore sources, lower wages, and newly built, stateoftheart mills enabled many foreign steel firms to produce at lower cost than U.S. firms. As a result, the share of worldwide sales of U.S. integrated steel firms fell from 90 percent in 1960 to less than 65 percent in the 19805. U.S. firms have been too slow to leave the market. Not until the late 19705 did Youngstown Sheet & Tube and the United States Steel Corporation in Youngstown, Ohio close. The next closing did not occur until 1982. Rather than close, firms have continued to operate aging, inefficient, and unprofitable plants. A steel firm faces substantial costs in closing a mill and terminating contracts. Union contracts obligate the firm to pay workers severance pay, supplemental unemployment benefits, and make payments to cover additional pensions and insurance benefits in the future. Usually, union members are eligible for pensions when their age plus years of service equals 75,- however, workers laid off due to plant closings are eligible when their age plus years of service equals 70. 1From Mary E. Deily, Exit Barriers in the Steel Market, Economic Review, 24(1), Quarter 1, 1988:1018. Thus by not closing plants, firms can substantially reduce pension payments. The United States Steel Corporation's cost of closing down various operations in 1979 was $650 million, of which about $415 millionor $37,000 per laid-off workerwas labor related. These costs have risen 45 percent since then. Because they avoided shutting down to avoid exit costs, U.S. steel mills have sold most products at prices below average variable cost since the 19705. For example, in 1986, the average variable cost of hot-rolled sheets per ton was $305 and the average cost was $406, but the price was only 5273. Many of these mills stayed in business for decades despite sizable losses. Eventually, these mills will close unless the recent increase in profitability in the industry continues. (a) Can you think of other firms or industries that would suffer large shut-down costs? (b) What would be the source of these costs