Government,The Firm & The Market
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Transcript of Government,The Firm & The Market
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Government,the Firm andthe Market
Government,the Firm andthe Market
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Reasons for Government InterventionReasons for Government Intervention
Government intervention and social objectives
The objective of social efficiency marginal social benefits and costs
MSB > MSC produce (or consume) more MSC > MSB produce (or consume) less
socially efficient output where MSB = MSC
Equity concepts of fairness
Trade-offs between equity and efficiency
Government intervention and social objectives
The objective of social efficiency marginal social benefits and costs
MSB > MSC produce (or consume) more MSC > MSB produce (or consume) less
socially efficient output where MSB = MSC
Equity concepts of fairness
Trade-offs between equity and efficiency
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Types of Market FailureTypes of Market Failure
Externalities
External costs of production MSC > MC
Externalities
External costs of production MSC > MC
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Q1
External costs in productionExternal costs in production
O
MC = S
DP
Co
sts
and
be
nef
its
Quantity
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O
MC = S
DP
MSC
Co
sts
and
be
nef
its
Quantity
External cost
Q1Q2
Social optimum
External costs in productionExternal costs in production
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Types of Market FailureTypes of Market Failure
Externalities
External costs of production MSC > MC
External benefits of production MSC < MC
Externalities
External costs of production MSC > MC
External benefits of production MSC < MC
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External benefits in productionExternal benefits in production
O
DP
MC = S
Q1
Co
sts
and
be
nef
its
Quantity
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O
MSC
DP
Q1
External benefit
Co
sts
and
be
nef
its
Quantity
MC = S
Q2Social optimum
External benefits in productionExternal benefits in production
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O
MC = S
DP
Q1Q2
Cos
ts a
nd b
enef
its (
£)
Quantity
MSC
External cost
(a ) External costs
O
DP
Q2Q1
Cos
ts a
nd b
enef
its (
£)
Quantity
MSCMC = S
External benefit
(b) External benefits
External costs and benefits in productionExternal costs and benefits in production
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Types of Market FailureTypes of Market Failure
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB
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Types of Market FailureTypes of Market Failure
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
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Types of Market FailureTypes of Market Failure
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
Public goods
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
Public goods
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Types of Market FailureTypes of Market Failure
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
Public goods non-rivalry
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
Public goods non-rivalry
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Types of Market FailureTypes of Market Failure
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
Public goods non-rivalry non-excludability and the free-rider problem
Externalities External costs of production
MSC > MC External benefits of production
MSC < MC External costs of consumption
MSB < MB External benefits of consumption
MSB > MB
Public goods non-rivalry non-excludability and the free-rider problem
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Types of Market FailureTypes of Market Failure
Market power
market power can be used to raise the price above the perfectly competitive level
output below the socially efficient level
MSB > MSC
Market power
market power can be used to raise the price above the perfectly competitive level
output below the socially efficient level
MSB > MSC
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MC1
Q1
MC
MRAR
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
O
P1
£
Monopoly output
Q
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O
P1
MC1
MC = MSC
Q1
MRAR = MSB
Q2
P2 = MSB
= MSC
£
QMonopoly output Perfectly competitive output
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
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Types of Market FailureTypes of Market Failure
Imperfect information
by consumers
by firms
Protecting people’s interests
dependants
merit goods
Imperfect information
by consumers
by firms
Protecting people’s interests
dependants
merit goods
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Business Ethics & Corporate Social ResponsibilityBusiness Ethics & Corporate Social Responsibility
Firms and social responsibility are managers solely responsible to shareholders?
are they simply concerned to maximise profits?
broader social interests
Business ethics a stakeholding society
corporate social responsibility
environmental scanning
Economic performance and social responsibility
Firms and social responsibility are managers solely responsible to shareholders?
are they simply concerned to maximise profits?
broader social interests
Business ethics a stakeholding society
corporate social responsibility
environmental scanning
Economic performance and social responsibility
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Government Intervention in the MarketGovernment Intervention in the Market
Taxes and subsidies
to correct externalities
Taxes and subsidies
to correct externalities
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Q1O
MC = S
DP
Co
sts
and
be
nef
its
Quantity
Using taxes to correct a market distortionUsing taxes to correct a market distortion
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O
MC = S
DP
MSC
Co
sts
and
be
nef
its
Quantity
External cost
Q1Q2
Social optimum
Using taxes to correct a market distortionUsing taxes to correct a market distortion
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Q2
MC
Q1O
P
Co
sts
and
be
nef
its
Quantity
Optimum tax = MSC – MC
MC = SMSC
D
Using taxes to correct a market distortionUsing taxes to correct a market distortion
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Taxes and subsidies to correct externalities
to correct for monopoly
Taxes and subsidies to correct externalities
to correct for monopoly
Government Intervention in the MarketGovernment Intervention in the Market
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Taxes and subsidies to correct externalities
to correct for monopoly
advantages of taxes and subsidies
can vary the rate according to the size of the market distortion
Taxes and subsidies to correct externalities
to correct for monopoly
advantages of taxes and subsidies
can vary the rate according to the size of the market distortion
Government Intervention in the MarketGovernment Intervention in the Market
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Taxes and subsidies to correct externalities
to correct for monopoly
advantages of taxes and subsidies
can vary the rate according to the size of the market distortion
disadvantages of taxes and subsidies
infeasible to use different tax and subsidy rates
lack of knowledge
Taxes and subsidies to correct externalities
to correct for monopoly
advantages of taxes and subsidies
can vary the rate according to the size of the market distortion
disadvantages of taxes and subsidies
infeasible to use different tax and subsidy rates
lack of knowledge
Government Intervention in the MarketGovernment Intervention in the Market
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Legislation
to control activities causing externalities
to prevent firms giving inaccurate information
to prevent the abuse of monopoly power
Regulatory bodies
purely investigative
with powers to act (e.g. OFT)
Legislation
to control activities causing externalities
to prevent firms giving inaccurate information
to prevent the abuse of monopoly power
Regulatory bodies
purely investigative
with powers to act (e.g. OFT)
Government Intervention in the MarketGovernment Intervention in the Market
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Environmental PolicyEnvironmental Policy
The environment and production
Green taxes and subsidies
use of green taxes around the world
The environment and production
Green taxes and subsidies
use of green taxes around the world
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Types of environmental taxes and chargesTypes of environmental taxes and charges
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Types of environmental taxes and chargesTypes of environmental taxes and charges
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Types of environmental taxes and chargesTypes of environmental taxes and charges
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Types of environmental taxes and chargesTypes of environmental taxes and charges
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Environmental PolicyEnvironmental Policy
Green taxes and subsidies (cont.)
choosing the tax rate
tax rate should equal the marginal external cost
advantages of taxes and subsidies
allows market to operate
can vary with the size of the externality
disadvantages of taxes and subsidies
infeasible to use different tax rates
lack of knowledge on extent of externality
Green taxes and subsidies (cont.)
choosing the tax rate
tax rate should equal the marginal external cost
advantages of taxes and subsidies
allows market to operate
can vary with the size of the externality
disadvantages of taxes and subsidies
infeasible to use different tax rates
lack of knowledge on extent of externality
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Environmental PolicyEnvironmental Policy
Laws and regulations the command-and-control approach advantages
simple to operate safe approach when size of externality not known
disadvantages requires robust monitoring and enforcement lack of incentives for firms to do better
Tradable permits how tradable permits work assessing tradable permits
Laws and regulations the command-and-control approach advantages
simple to operate safe approach when size of externality not known
disadvantages requires robust monitoring and enforcement lack of incentives for firms to do better
Tradable permits how tradable permits work assessing tradable permits
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits
Competition, monopoly and the public interest the abuse of market power
higher prices and profits
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Profit maximising under monopolyProfit maximising under monopoly
MR
£
Q O
MC
Qm
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£
Q O
MC
AC
Qm
MR
AR
AC
AR
Total profit
Profit maximising under monopolyProfit maximising under monopoly
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
approaches to competition policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
approaches to competition policy
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
approaches to competition policy banning various activities
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
approaches to competition policy banning various activities
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Competition PolicyCompetition Policy
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
approaches to competition policy banning various activities examining each case on its merits
Competition, monopoly and the public interest the abuse of market power
higher prices and profits lack of incentive to innovate
market power can also bring benefits economies of scale investment and innovation
approaches to competition policy banning various activities examining each case on its merits
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Competition PolicyCompetition Policy
UK competition policy the OFT and the Competition Commission
restrictive practices policy
legislation under 2002 Enterprise Act
criminal to engage in cartel arrangements
• price fixing, limiting supply, sharing out markets, collusive tendering, agreements to pay low prices to suppliers
OFT has discretion with other types of agreement
• vertical price fixing, agreements to exchange information
powers of the OFT
difficulties in rooting out collusion
UK competition policy the OFT and the Competition Commission
restrictive practices policy
legislation under 2002 Enterprise Act
criminal to engage in cartel arrangements
• price fixing, limiting supply, sharing out markets, collusive tendering, agreements to pay low prices to suppliers
OFT has discretion with other types of agreement
• vertical price fixing, agreements to exchange information
powers of the OFT
difficulties in rooting out collusion
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UK competition policy (cont.) monopoly policy
Chapter 2 prohibition of 1998 Competition Act• market-share criterion• market contestability
anti-competitive practices• charging excessively high prices, price
discrimination, predatory pricing, vertical restraints test: do such practices restrict competition?
merger policy (2002 Enterprise Act) role of OFT and Competition Commission criteria for judgment
Assessment of competition policy
UK competition policy (cont.) monopoly policy
Chapter 2 prohibition of 1998 Competition Act• market-share criterion• market contestability
anti-competitive practices• charging excessively high prices, price
discrimination, predatory pricing, vertical restraints test: do such practices restrict competition?
merger policy (2002 Enterprise Act) role of OFT and Competition Commission criteria for judgment
Assessment of competition policy
Competition PolicyCompetition Policy
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The Regulation of BusinessThe Regulation of Business
Regulation and the privatised industries
nationalisation and privatisation
Regulation in practice:
use of general competition policy
specific regulation
regulatory offices
price-cap regulation
the CPI–X formula
Regulation and the privatised industries
nationalisation and privatisation
Regulation in practice:
use of general competition policy
specific regulation
regulatory offices
price-cap regulation
the CPI–X formula
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Advantages of UK regulation discretionary
flexible
incentives
Disadvantages of UK regulation disincentives of changes to X
complexity of regulation
principal–agent problems between regulator and industry managers
Advantages of UK regulation discretionary
flexible
incentives
Disadvantages of UK regulation disincentives of changes to X
complexity of regulation
principal–agent problems between regulator and industry managers
The Regulation of BusinessThe Regulation of Business
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Policies to increase competition allowing competition where there is no
natural monopoly limited extent of true natural monopoly
allowing access to grids by competitors forbidding suppliers from being grid owners
competitive franchising to make monopolies contestable
Still need for regulation to prevent abuse of monopoly power
Policies to increase competition allowing competition where there is no
natural monopoly limited extent of true natural monopoly
allowing access to grids by competitors forbidding suppliers from being grid owners
competitive franchising to make monopolies contestable
Still need for regulation to prevent abuse of monopoly power
The Regulation of BusinessThe Regulation of Business