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Government intervention and international trade (Government intervention…
Government intervention and international trade
Government intervention
Objectives
Social Efficiency
best allocation of resources
MSB = MSC
Equity
when distribution of resources is deemed fair
Market failures
:check:
Market Power
Consumer surplus = TUtility- TExpenditure
Producer surplus = Revenue - min Cost
Total surplus = consumer + producer
Deadweight welfare loss: reduction in total surplus below max possible amt
Externalities
spillover effects of a particular activity
:recycle:Consumption/Production Externalities
External cost ( pollution) &
benefits( training provided)
Social Costs
= private costs + net externalities of production
Social benefits
= private benefits + net externalities of consumption
Public Goods
non rivalry( consumption by 1 person prevents consumption by another
non excludability( impossible to prevent pple who have not paid from consuming)
eg: defence, policing,
Merit Goods
private goods that confer undervalued private and large external benefits
Demerit goods
incur undervalued private costs as well as external costs
Types of intervention
Tax and subsidies on goods and services
MSC> MC - tax equal to MEC imposed to bring private cost up to social cost
MSC< MC - subsidy equal to MEB
MSB>MB- subsidy equal to MEB given
MSB<MB- tax equal MEC to be imposed
Changes in Property Rights
extending property rights to one party
Case study of wheat farmer and railway owner
Legislation and regulation
regulate activities that impose external costs
regulate monopolies and oligopolies
protect consumer from unsafe products
Price control
prevent monopolies from charging unreasonable prices
rectify misallocation of resources
redistribute income ( min wage)
:red_cross:side effects like shortages in supply, black markets might develop. floors above equi will result in surpluses and unemployment
Provision of information
enable consumers to make better decisions
Direct provision of goods and services
Public goods:defence, lighthouses
merit goods: education , pension
publicly owned entreprises: BBC/ RBS
reasons for merit good: ignorance, social justice, large +ve externalities, dependants
Welfare system
Case for less intervention
Bureaucracy & inefficiency
Shortages and surplus
Negative effect on incentives
Reduction in individual freedom of choice
Government and the firm
Competition policy
:check:Restrictive practices policy
oligopolist collude -> higher prices
:pencil2: Restrictive policies control anti -competitive policies
which includes horizontal price fixing, limiting production, limiting technical development, sharing out markets/ sources of supply, discriminatory pricing, collusive tendering, forcing other firms to accept unfavorable contract terms, boycott suppliers/ distributor who deal with competitors
:check:Monopoly policy
concerned with abuse of market power and anti-competitive practices
:pencil2: 1st - check firm's position of dominance 40% of market share
:pencil2:2nd- check if firm is using market power to restrict competition
tie-in sales: if buy A must also buy B
Case study : Microsoft and window players
:check:Merger policy
prevent mergers that would significantly reduce competition.
Process of investigation:
:pencil2:notification of merger
:pencil2:prelim check if competN is likely to be reduced
:pencil2:decision followed by monitoring
Effectiveness of competition policy
now focus more on conduct and performance than structure; fines and jail terms; EU merger control is too lenient and regulations too flexible for merger to go ahead with few conditions attached. If competition in EU -> firms may not be large to compete globally
R and D policies
Technology policy
Invention
Innovation
Diffusion
Without government intervention, market forces may not do R & D
:no_entry:R and D free riders
:no_entry:Monopolistic and Oligopolistic structures
:no_entry:duplication
:no_entry:risk and uncertainty
Forms of intervention
Patent system
Public provision ( R & D through universitiesor institutions)
R & D subsidies
Co-operative R&D
Diffusion policies
Others: education and training, Competition, national defence